What should you consider before taking out a vehicle loan?
Not many of us are fortunate enough to be able to pay for our vehicle in full using cash. As a result, we usually have to resort to taking out a loan in order to finance our purchase. A few of you have asked me to write about our own thought process when we got our car last month, so here’s me continuing this as Part 2 of my previous post here.
The first thing you’ll want to do before
you decide to even go ahead and get that car, is to first check your finances
to ensure you don’t end up stretching yourself too thin with loan repayments
later on.
Liquidity vs. loan interests –
What can I afford?
Depending on the Open Market Value (OMV) of
your car, you can get maximum financing of up to 60% or 70% of the OMV. If the
OMV of the car is below S$20,000, then you can get financing up to 70% and cars
with OMV of S$20,000; above that is up to 60%.
But this doesn’t mean that you absolutely
have to take the maximum financing offered to you! If you have cash to spare,
there are two options you can consider:
1.
Should I make a larger
downpayment in cash and take a smaller loan?
2.
Should I spread my repayments
over a longer or shorter loan duration?
Always be wary of car brokers, because
while there are some good dealers around, there are also plenty who are simply
out to sell you a junk car and reap fat profits off the sale. Many of the dealers
will also offer you stuff like an in-house loan and an extended loan tenure. “So
you pay less every month, no need to worry!” they will sing. Please be smart
and don’t fall for their tricks.
If you have cash to spare, a lower loan
quantum and/or a shorter loan tenure will result in you paying less interest at
the end of the day.
Repayments terms and early repayment penalties
Make sure you read the repayment terms of
your loan carefully. For instance, banks such as DBS, POSB and Maybank charge
an early redemption fee of 20% of the total interest payable + an additional 1%
of the original loan amount as an early redemption fee. You might want to pull
out your calculator and look into this before running to the bank with your
cheque book.
But because I was there, I stopped him from
taking all our documents before I was done reading and checking every page.
Yes, it took up more of his time, but what’s a few more minutes when they’re
earning big commissions from your purchase? Don’t let them make you feel bad
for wanting to protect your own interests and make sure you aren’t being
scammed.
Even if you trust them (but I never trust
anyone 100% except myself when it comes to money), please be sure to read
though every single page! Yes, I know the document is thick, but if you fail to
check and you end up signing your life away to some exorbitant interest rate or
dubious terms that you weren’t aware of…no one is going to save you afterward.
Should you get a new car or
settle for a used car?
Of course it goes without saying that used
cars are cheaper to own than new cars (under the same category obviously). But
are the loans on used cars cheaper as well? Unfortunately, not always. Here’s
an example.
This is the difference between OCBC New Car
Loan and Used Car Loan rates:
No matter which loan tenure you choose, you
will be making more interest payments on a used car loan when compared to a new
car loan.
Another aspect that you need to address
when deciding between a new car and a used car is that financing options are
limited for the latter. The older your car, the more limited your choices
become. We got a 10-year-old secondhand car, and many of the more
well-established banks did not offer loans for secondhand vehicles that old, so
we ended up going with a smaller player (which wasn’t my first choice. I was
aiming to go for a DBS or OCBC loan, but we literally had no choice as our car
was too old). Almost all top banks including DBS/POSB, OCBC and UOB among
others offer car loans for new purchases. However, not all offer the same
options for used car purchases.
If you’re strapped for cash, a used car
might not be the best option for the long haul anyway. Should you decide to
extend the use of your car beyond 10 years, you will forgo your Preferential
Additional Registration Fee (PARF) rebate, incur an additional surcharge on
your road tax and even getting good insurance cover will be a problem.
So, with a new car purchase, you don’t have
to worry about your car for the next 10 years but with a used car, the older it
is, the closer you are to worrying about the exact same situation again if
you’re planning to have a vehicle for a long time.
Are you planning to keep the
car for long or looking to part ways in the near future?
This decision can greatly affect all the
above considerations. For instance, let’s say you’re not set on retaining your
car for more than a few years and looking to change or upgrade to a better car
somewhere down the road. Have you accounted for this when choosing your
repayment tenure, especially if there are early repayment penalties charged if
you terminate early?
If you’ve taken a car loan for a tenure of
6 years and are planning to keep your car only for 3, then your plan is flawed;
you can either terminate your loan early by paying the outstanding balance and
the early redemption fee, or you have to keep the car for the next 3 years.
However, borrowing from the previous point,
if you’re planning to change your car down the line, a used car might do you
some good. That’s because your overall cost to get moving on the road with your
car will be cheaper and you can afford a shorter tenure. Getting a used car
might even let you save for your dream car without tampering with the
convenience factor of owning your own vehicle to get to places. Of course,
there’s also the intangible benefits such as not having to worry about train
breakdowns, or not being able to get a cab anymore.
Who’s paying for the car? Can you afford the monthly
repayments?
Another important point to consider is if
the car belongs to the both of you, or if it’ll mostly be used by your spouse
alone.
In my case, I hate driving on the roads
(especially as road rage by some other drivers towards a female drivers is
really terrible) so I was not for the idea of getting our own car at all.
However, my husband needed it for work, and we did our calculations before
realising that the amount he spends every month on Grab and Uber are almost
equivalent to what our friend spends on his car every month (not to mention the
inconvenience and stress of not being able to get a ride).
Should we spend a bit more money every
month for the time savings and convenience that a car affords? After evaluating
the decision for months, we finally decided to go ahead.
Since my husband
will be the only one driving the car, and since he earns a higher income than I
do, we both agreed that he will pay for the car in its entirety.
Always make sure
that you never spread yourself too thin with your loan repayments. If you have
to dip into your retirement savings or even borrow just to finance your
purchase and loan, then perhaps you might want to reconsider if you
realllllllly need it.
I hope this
helps! Many thanks to the team at BankBazaar.sg who helped to offer some ideas on what we should look
out for.
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