best way to finance a car

Best Way to Finance A Car in Singapore: What Are The Options?

Singapore is probably home to the world’s most expensive cars: for example, Toyota’s 2021 Vios is considered an entry-level vehicle in the Philippines and nearby Malaysia and Indonesia — but buying it in Singapore is like owning a luxury car.

The Vios’ E variant equipped with an automatic CVT actually sells for S$133,888 through a Singapore car dealership. But the exact same model in Malaysia — an area that Singaporeans can access by land — costs around a jaw-dropping S$26,486 according to the latest exchange rates; move over to Indonesia and get a good deal for Rp239.7 million or S$27,567.

It gets better: in the Philippines, three hours away via plane, this car only costs around P916,000 or a whopping S$22,411 — which always begs the question: what is the cheapest option for Singaporeans when buying a new car? Should they go direct to a car dealer or would it be better to go through a bank?

Financing A Car in Singapore: What Are The Options?

People who want to buy a car but cannot pay for the new car outright due to not having enough money have various car financing options. Now, not all installment plans are the same, as they do have their own strong points and disadvantages.

There are four options for buying a car through a loan in Singapore:

  • In-house financing package
  • Bank loan
  • Lease-to-own schemes
  • Balloon scheme

1. In-house financing package

As the name suggests, this car loan is offered by car dealerships or companies that sell the vehicles. However, buyers would not pay the dealer; a third-party finance company would handle the financing.

How it works

This works when a person engaged in car buying goes straight to a dealership’s showroom to pick a preferred vehicle. The car dealer then provides the total cost when paid in cash and other installment payment options.

If a buyer picks a monthly payment or other installment package — that is the in-house package, which usually promises less stringent and quicker processing of applications, and more flexibility in picking a term.

Pros

  • Easier and less strict application processes almost ensures a high chance of loan approval.
  • Getting in-house packages usually does not affect a person’s debt servicing ratio, or the computation of where operating income is divided against existing financial commitments to gauge the capability to pay off an outstanding loan.
  • This means getting a car from the dealership itself may not put a dent on the credit rating and credit score.

Cons

  • Easier application processes are not free — they come with a drawback. In most cases, loan processing for in-house packages is high, ranging from S$200 to around S$900 in some cases. Down payment is sometimes high, too.
  • The interest rate is also high, and finance companies attached with car dealers are often strict with late payments and unpaid interest — which can lead to vehicles being towed away. Additional penalty fees for late payments are also higher than usual.

2. Bank loans

Bank loan is basically a personal loan but made specifically for buying a used car or a new car. This is usually the preferred loaning scheme because overall, they offer the best price due to lower interest rates and flexibility.

How it works

Customers can visit a bank of choice for an auto loan, followed by bank agents determining how much a person can borrow to get a car loan, and what are the possible terms. The borrowed amount plus the interest is usually settled between 12 months to 60 months.

Upon agreement and inspection of the credit report, the bank lends a car buyer the money needed for payments aside from the down-payment. Good credit scores are a plus as records of bank loan applicants would be scrutinized.

Pros

  • Low-interest rate
  • Bank loans give buyers flexibility as they can pick available options for their preferred car. With in-house packages, if the offerings of the car dealer do not look appealing, the recourse is to buy from another dealership or pick another car.

Cons

  • Strict requirements mean more scrutiny of past transactions; late payments to other loans and other credit questions may be flagged. Banks would also check on buyers’ monthly income.
  • Usually, banks are the first owners of cars purchased through this method — meaning, the person who actually bought it is the second owner, once the loan payment is settled. It usually has a negative effect if the car owner intends to sell it after a few years, as some buyers do not want to be the third owner due to a car’s nature as a depreciating asset.

3. Lease-to-own schemes

If a buyer does not have a good credit score and the huge money to buy straight out or comply with high monthly payments, lease-to-own can be an option as down payment and dues are easy to settle.

How it works

Various car rental companies in Singapore offer lease to own schemes, especially for the used car market. Buyers can approach these companies even through online sites to inquire about their offerings.

A specific amount must be deposited before the company delivers the car, which is already registered to the owner.

Pros

  • Already included in the down payment and monthly payments are running costs that a car owner would encounter, like registration fees, insurance, road tax, and the very expensive certificate of entitlement (COE).
  • Lease to own offerings usually include perks like scheduled car servicing and other preventive maintenance checks.

Cons

  • As with bank loans, the buyer is not considered the first owner of the vehicle. Also, there is the risk of acquiring a high-mileage vehicle, which means more maintenance problems may.
  • There is also the danger of buying used cars with less time left on it — or a car which has a COE that is about to expire. While there are rebates, renewing an old car’s COE costs so much.
  • Aside from stiffer penalties for non-payment, there are confusing paperwork that a buyer would need to process if he or she intends to sell the car, or settle the loan early, aside from the early settlement fee.

Hand with car key and remote

4. Balloon scheme

The predecessor of the lease-to-own scheme, the balloon car financing method claims to provide buyers flexibility in terms of down payment and lower monthly payments compared to other options. In return, buyers would pay larger sums towards the end of the loan’s tenure.

There are independent car dealers that offer balloon schemes, while there are now car manufacturers’ direct dealers offering this method. However, like lease to own, the process is also complicated and can get messy depending on certain conditions.

How it works

As it is similar to a lease to own, buyers can also approach dealers to inquire if they are offering this financing scheme. Prices and terms vary from one car model to another.

A specific percentage of the car’s value would be paid off as a down payment, while several documents would be required. Customers can also avail of a PARF rebate, but more on that later.

Pros

  • Buying a car through balloon financing would mean that the dealer would already shoulder some maintenance costs, including free preventive maintenance costs, while there are times that insurance fees and registration expenses are already covered.
  • Down-payment and monthly dues are usually less expensive than an in-house financing scheme or a bank loan due to the fact that payments get bigger later on due to more interest.

Cons

  • There is a quota placed on annual mileage: although the quota is sometimes manageable, especially in a small country like Singapore, busy drivers would be limited to how long they can drive in a year.
  • It is hard or almost impossible to trade in or sell cars obtained through a balloon scheme while the loan is active. Also, there are few protections for owners should the car be totaled; payments may still be required still if the accident occurred during the loan tenure.

Acronyms That Matter

If you are not aware of how cars get registered in Singapore or if you are not really familiar with cars at all, here are some terms you might want to know:

  • COE

This Certificate of Entitlement is basically why car prices are so high in Singapore — it is the certificate that allows people in the city-state to own a car, which makes settling this fee mandatory before owning a car. According to a news story from Malay Mail last June 2022, the COE for all types of car has increased, with those under Category A now starting with S$73,801 from S$68,001.

  • OMV

Open Market Value is a car’s true valuation price before Singapore-related expenses like registration fees, COE, mandatory insurance, and others. In the example provided, the Toyota Vios’ OMV appears to be between S$24,000 to S$27,000 — which actually explains its S$130,000 purchase price in Singapore, as this is brought by additional costs from the COE and the ARF.

  • ARF

The Additional Registration Fee is an additional tax car owners need to pay before the new car gets registered. Usually, it costs as much as the car’s value.

  • PARF rebate

It stands for Preferential Additional Registration Fee rebate, which a rebate when a car less than 10 years old is registered just before it reaches its 10th year. As car owners pay a COE which makes allows vehicles on Singaporean streets for 10 years, the discount comes as a form of a subtraction on the COE for the years the car was not registered. Find out more on the differences between  COE and PARF.

  • GST

Good and Services Tax, an additional fee stamped on most products including even food at airports. However, car buyers can also find this in their car expenses, which goes for seven percent at the present time.

People at vehicle dealership buying new car.

How Much Can I Borrow For a Car Loan?

How much a car buyer can borrow for a loan in Singapore depends on the car’s OMV or open market value. It might sound tricky, but the formula is easy:

Open Market Value of car selected

Maximum amount to be borrowed

If car’s OMV is does not exceed S$20,000

Loanee can borrow up to 70 percent of car’s original price/ OMV

If car’s OMV goes past S$20,000

Loanee can borrow up to 60 percent of car’s original price/ OMV

 

Buyers should also note that the figures provided are maximum borrowable amounts — it’s possible that banks or car dealers offer a lower cap, like 50 percent for vehicles with an OMV over S$20,000 or even less.

Loan tenure

Usually, loan terms for auto loans can last up to seven years — providing buyers a longer, staggered means of settling bills so that expenses would not pile up. However, this would force buyers to pay higher all in all due to the interest incurred over time.

But similarly, shorter loan terms would force buyers to pay higher monthly dues. This implies that loan tenure is a personal decision, as buyers would have to pick one that suits them.

For second-hand vehicles, the car owners can pay the loan within the remaining time under its COE. If the vehicle was registered six years before the present date, then the maximum loan tenure is similar to the remaining time before the car’s COE expires, or in this case, four years.

Prepare yourself financially before applying for an auto loan

It is an understatement to say that people planning to buy new cars should prepare financially. After all, it cannot be compared to purchasing appliances, as it would cost so much, especially in Singapore; and it would need maintenance from time-to-time, while having the risk of a road accident.

One step that buyers may take is to check their credit score and, if possible, improve it first before getting a car through financing. That way, the loan schemes, minimum down-payment, and monthly payments, including the interest rates might be more manageable, as a good credit score assures the lender that the loan can be settled on time.

How to choose the best option

Different choices have to be made when applying for an auto loan — including assessing whether the car is necessary, if buying a car is feasible, and eventually picking the best financing option.

Financial advisers stress that the best choice is the option where the buyer would still have a generous monthly income despite paying off the monthly loan.

Answering these questions would also help: a buyer wants a cheap down-payment and would have more income over the years. Then they can look at the lease-to-own and balloon schemes. Looking at ease in applying for a loan, then they can go with in-house financing; meanwhile, people looking for low interest can opt for bank loans as interest rates do not exceed three percent.

Best car loans interest rates for 2022

What’s in the table: car loans from banks for a second-hand car that is payable in five years, where the requested total amount of money to be borrowed is S$30,000.

Bank offering car loan

Interest rate per annum/ Minimum loan amount

Monthly installment/ maximum loan tenure

DBS Car Loan (not applicable for company cars) 2.28 %/ S$10,000 S$557 at max of 7 years
Hong Leong Finance Car Loan 2.28 %/ S$10,000 S$557 at max of 7 years
Maybank Car Loan 2.28 %/ S$10,000 S$557 at max of 7 years
OCBC Car Loan 2.28 %/ S$15,000 S$557 at max of 7 years
Standard Chartered Auto Financing 2.28 %/ S$10,000 S$557 at max of 7 years
UOB Car Loan 2.28 %/ S$10,000 S$557 at max of 7 years
Tokyo Century Leasing Car Loan 2.78 %/ S$20,000 S$569.50 at max of 7 years
Hitachi Capital MYHP (Auto Loan) 2.78 %/ S$15,000 S$569.50 at max of 7 years

 

Closing

Responsibilities surrounding car owners are not relegated to just maintaining the car, as people also need to be mindful of the expenses surrounding it, especially in Singapore. That being said, it is best to remember these three things:

Key Takeaways

  • Picking a loan is a personal decision, as what suits one person may not be good for another
  • It is important to know whether the vehicle being purchased would be sold again in the future, as this can help people deduce options
  • Buyers should have prepared for additional monthly costs brought by car ownership, taking into account unexpected expenses like health issues and accidents.

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