Fancy sedan caught your eye? Read this first

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below:

Understanding car loans:

A car loan is a type of secured loan where your car acts as collateral for the amount borrowed.

The maximum loan you can borrow depends on your car’s Open Market Value (OMV).

Besides the downpayment and monthly loan repayments, remember to consider other financial factors before you purchase your car.

 

If you are shopping for a new set of wheels, be sure to go beyond the model, colour, size, and specs. Before you even cruise that far, first consider the financial aspects, as a car can be a costly commitment.

Most of us would take a loan to fund our purchase. A car loan is a type of secured loan, in which the car is the collateral that the lender can repossess in the event you default on repayments.

Here’s what you need to know before buying those fancy wheels.

In Singapore, a key factor that determines your car loan amount is the car’s Open Market Value (OMV).

For example, say a second-hand sedan in pristine condition has caught your eye. It has a valuation price of S$62,000 and a purchase price of S$60,000. Here is how much you will have to fork out in cash for the downpayment:

Purchase Price S$60,000
Valuation Price S$62,000
OMV S$17,426
Maximum Loan Amount 70% (OMV is less than S$20,000) x S$60,000 (purchase price is lower than valuation price) = S$42,000
Downpayment S$60,000 – S$42,000 = S$18,000

Based on example in DBS Car Marketplace

In terms of loan tenure, you typically have a choice of 1 to 7 years. However, do note that a car loan covers only the first 10 years of the car’s life. This means that for used cars, the maximum loan tenure is 7 years or the number of years left on its Certificate of Entitlement (COE), whichever is lower. For instance, if the sedan you are keen to buy is 4 years old, the maximum loan tenure you can get is 6 years (10 years – 4 years).

The downpayment and monthly loan repayments form only one part of a car owner’s expense journey. Other considerations to note include:

  • COE: Required by law in Singapore, it allows you to drive your car for 5 or 10 years. The amount fluctuates, depending on market demand, but is generally at least five figures. The variable cost of COE is particularly important to bear in mind if you are buying a second-hand car with the intention of renewing its COE.
  • Additional Registration Fee (ARF) and Preferential Additional Registration Fee (PARF): The ARF is a tax to be paid when registering a car and is calculated as a percentage of the OMV. You can get a rebate through the PARF if you deregister your car before its COE expires at the 10-year lifespan.
  • The car’s resale value and depreciation: Unlike other assets such as a home or stock and bond investments—which may potentially rise in value over time—a car’s value typically goes only one way: south. Hence, you’re likely to sell your car at a lower price than when you bought it.

    In fact, there is a method of calculating a car’s annual depreciation, which takes into account its total cost, sale value, and years in use, among others.
  • Deregistering your car: When your car’s COE expires, it is no longer allowed to be driven and you have to deregister it. Deregistering your car involves disposing of it by scrapping or exporting the car, or storing it temporarily in an Export Processing Zone while waiting for it to be exported.

    If you choose to scrap your car, consider its scrap value, as well as whether it is eligible for any rebates, such as COE rebate (if your COE hadn’t expired at the point of deregistration) and PARF rebate.
  • Other costs: Include maintenance and servicing, fuel, season parking(home and office), Electronic Road Pricing, road tax, and motor insurance.

 

Ultimately, it is important to weigh the financial viability of car ownership before you drive off with that new car and new car loan.

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