Car Loan Hacks for New and Used Cars

Singapore is one of the most expensive countries to own a car. Before you think of buying one, know how you're going to finance that hunk of shiny (or used) metal.

Car loans for new and used cars

A car loan is a long-term financial commitment. Before you start shopping for cars, it's best to do your homework to see how you will finance the car. Here are a few things to bear in mind.

Your car loan is affected by the Total Debt Servicing Ratio (TDSR)

The TDSR is part of the government’s efforts to ensure financial prudence among Singaporeans. TDSR places limits on the amount a person can borrow and the maximum amount a bank can lend. It limits the amount you can borrow to 60% of your gross monthly income. So, if you earn $10,000 per month, the total amount of monthly loan repayment cannot exceed $6,000. The loans that are considered include home, car, personal loans and credit card balances (including interest-free instalment plans).

See also: Understanding TDSR And Its Impact On Your Loan Applications

Credit Bureau rating affects your loan application

The Credit Bureau collects and consolidates all information about all your loans and credit facilities and uses it to advise financial institutions of your financial ‘standing’. It will give a rating of your ‘creditworthiness’. If you have a bad track record, you might get a lower loan or not at all.

See also: What is a Credit Rating, and Why Should Singaporeans Care?

Your car loan can impact your home loan

If you have just started working and have not bought a home, consider if you really need a car. Because your car loan affects the overall amount you can borrow for your home later on. If you have over-committed to a car, you might not get the full loan you require. So, if you are planning to buy a home, do your numbers with that in mind. If you can manage without a car, hold off on that fancy car for the time being. You can even put aside the ‘possible’ car repayments as savings for your home.

Similarities between loans for new and used car

• The downpayment is determined by car’s Open Market Value (OMV)
• For cars with OMVs below $20,000, you need to pay 30% of the car’s price
• For cars with OMVs above $20,000, the downpayment is 40% of the car’s price
• Loan tenure is from a minimum of 1 year to a maximum of 7 years
• For used cars, the loan tenure is 7 years or the number of years left on its COE, whichever is lower

Differences between loans for new and used car

New car buyers don’t have a choice of banks as they have to apply for the car loan through the dealer they are buying the car from. So, they are stuck with the dealer’s partner bank or banks. Sometimes a dealer may offer you two bank options. The rate is about 2.78% p.a. without any promotional offers.

Sometimes, dealers will also have a clause that forces you to buy a 2-year insurance from their partner banks. This might impact your No Claim Discount with your previous insurance company when you change insurance providers.

Used car buyers, however, are free to source their own car loan for used cars from any bank. They can shop around and choose the best rate. There is usually a lower rate for loans of $50,000 and above.

Car Loans are front-ended

Unlike other loans (including home loans), your interest payment doesn’t decrease as you reduce your loan. The interest is calculated on the whole tenure of your loan and added to the total loan. So, you are paying interest all the way to the end of the loan. For example:

• You buy a new car for $80,000
• You pay $40,000 in downpayment and take a loan of $40,000 at 2.78% p.a.
• Total interest works out to $1,112 per year and $7,784 for a 7-year loan

Car loan hack

Paying more than $1,000 a year in interest is frankly, a huge drain on your finances. One way to beat it is to use the Balance Transfer (BT) facility in a creative manner. A BT is a feature offered by banks to encourage you to use the credit available on your cards and overdrafts at a very low interest. They charge zero interest, but impose a flat 1% to 2% processing fee on the amount. The tenure usually varies between 6 and 12 months.

Here’s an example:

• A car loan of $45,000 over 7 years costs $8,757 ($1,251/year) in interest
• You do 3 BTs ($15,000 each) on your credit card and/or personal loans at a 2% processing fee*
• Interest works out to $900, $702, $500, $294 and $83 respectively from Year 1 to Year 5.
• In total, your total interest payments over 52 months work out to $2,479. You save a whopping $6,278 ($8757 - $2,479).

The savings are substantial but here are the downsides:

• The best BT rates are offered for a 6-month tenure. So, you need to re-do the BT every 6 months.
• You will need to manage 3 different loans as opposed to one car loan. But the huge savings are more than worth the hassle.

Looking for a car loan or a balance transfer? SingSaver compares the best car loans for both new and second-hand cars in Singapore based on interest rates, loan tenures and welcome offers. 

*Based on 1% processing fee for a 6-month tenure

≠ Repaying your car loan using BT

• Year 1

- Loan outstanding – $45,000 + 900 (interest)

- Repayment @ $900/mth = $10,800

• Year 2

- Loan outstanding – $35,100 + $702 (interest)

- Repayment @ $900/mth = $10,800

• Year 3

- Loan outstanding – $25,002 + $500 (interest)

- Repayment @ $900/mth = $10,800

• Year 4

- Loan outstanding – $14,702 + $294 (interest)

- Repayment @ $900/mth = $10,800

• Year 5

- Loan outstanding – $4,196 + $83 (interest)

- Repayment @ $900/mth (4.75 mths) = $4,754

By Isaac Anil

Isaac thinks life is what happens in between football matches. He is a born again dog lover who thinks cats are overrated. Having tried his hand at multiple vocations, he holds the same opinion about hard work. Till he can figure a way to beat the system, he relies on whiskey to get by.