Should You Take a Car Loan From the Bank or Your Dealer?

Bank car loans are more tightly regulated, while dealer in-house loans can offer greater flexibility. Which of these two options should car owners choose?

Given Singapore’s sky-high car prices, it may be cold comfort that car loans here are relatively cheaply priced. But when car ownership costing six figures is becoming the norm rather than the exception, every little bit helps. 

Between bank car loans and dealer in-house loans, car owners have quite a range of options to meet their vehicle financing needs. Also, it may surprise you to know that banks do not have a monopoly on the lowest-interest car loans. 

Here’s what you need to know when deciding whether to get your car loan from a bank or your dealer.

• Overview: Bank car loans vs. Dealer in-house loans
• What are bank car loans?
• What are dealer in-house loans?
• What is balloon scheme financing?
• Which is better: Bank car loans or dealer in-house loans?

Overview: Bank car loans vs dealer in-house loans

Understanding bank car loans

Bank car loans are quite competitively priced, with major players often offering the same interest rates. 

On average, bank car loans start from 2.78% p.a. for ICE cars, while packages for electric cars can be found for slightly cheaper, at 2.48% p.a.

Used car loans are also available, and may have interest rates that are slightly higher or lower than for new cars, depending on the bank, and whether there are any promotions.

Bank car loans aren’t without their drawbacks. For one, your loan application will require a credit check, and a poor credit score could jack up your interest rates, or even see your application rejected altogether. 

Also, your car loan – even though it is technically a secured loan; your car acts as the collateral – will count towards your Total Debt Servicing Ratio (TDSR).

See also: Loan-to-Value (LTV) Ratio & Limits in Singapore

If your car loan and other debts add up to 55% of your monthly income, you won’t be able to apply for a home mortgage. 

Finally, banks may take longer to process your car loan, owing to the need to conduct credit checks and other regulatory requirements.

When taking a car loan from a bank, you can borrow up to 70% of the value of the car (60% for vehicles with an Open Market Value (OMV) greater than S$20,000).

Loan tenures of between 1 to 7 years are typically offered.

Read more:
Best Car Loans in Singapore (2022)
The Cost of Owning a Car in Singapore
How to Calculate a Car Loan Payment in Singapore
Common Mistakes When Refinancing a Car Loan in Singapore

Understanding dealer in-house loans

Car dealers offer in-house loans as an alternative to bank car loans. However, car dealers are not required to adhere to MAS guidelines on car loans like banks are, which is why you will find greater variance in loan terms and interest rates. 

A quick Google search revealed that car dealers are dangling in-house loans with interest rates starting as low as 1.68% p.a., and with loan tenures of up to 10 years.

You may also borrow up to 90% of the cost of the vehicle. 

Also, in-house car loans do not count towards TDSR – this allows car owners to avoid impacting their home loans. Loan processing is also quicker, as credit checks are not required. 

Dealer in-house loans can offer higher flexibility and convenience, which may make it easier to find a financing package that suits your needs. 

However, you may have to foot a variety of fees and charges, and be subject to invisible markups – all of which can increase your cost of borrowing, even if the base interest rate offered looks enticing on paper. 

To avoid any unpleasant surprises, be sure to check the terms and conditions thoroughly before signing up.

Clarify any charges you do not understand, and check online reviews for signs of potential trouble.

What is balloon scheme financing?

Your dealer may also offer you what is known as balloon scheme financing, touting lower monthly instalments as the main benefit. 

Yes, it is true that balloon scheme financing can offer lower payments each month, but the advantage is only for the short term. This is because of how a balloon payment scheme works.

In a balloon scheme motor loan, the vehicle’s PARF rebate value is initially deducted from the loan. The interest on the loan is calculated based on the car’s price after this deduction – this results in a lower instalment amount.

Until the final instalment, that is.

The PARF value that was deducted from the loan (and for which no interest was charged) is payable on the last instalment, which will make for a pretty mind-blowing final bill. 

As such, a balloon payment scheme requires you to be vigilant about your finances, as you will need to either consistently sock away money for the PARF value, or find some way to come up with several tens of thousands of dollars as the final instalment approaches. As if owning a car isn’t already stressful enough!

If you’re offered such a scheme, be sure to weigh carefully whether you will be able to keep to the terms of the loan. The lower instalment payments may not be worth the hassle of having to come up with a large sum of money at the end.

Bank loan or dealer in-house loan – Which should you choose?

As a general rule, you should always go for the loan with the lowest interest rate, as this will give you maximum savings. 

However, if the lowest rate loan you can find is being offered by an organisation you are not comfortable doing business with, then it may be worthwhile getting your car loan from an entity you trust, even if you end up with a slightly higher interest rate.

After all, a car loan is a major financial commitment, and having peace of mind is important.

That in-house car loans from dealers do not count towards your TDSR may be enticing to some, but this can also be a double-edged sword. 

Those who are not careful can find themselves overleveraged, struggling under the weight of too much debt.