How To Calculate Car Loan Interest In Singapore

Finance,

In Singapore, acquiring a car is notoriously expensive. Few can doubt this, including those in the upper-middle class. 

While the high cost can make owning a car seem an unnecessary luxury, every human has an innate need for self-accomplishment. 

In Singapore, few things can spell the phrase, “I finally made it” with ease like a car can.

However, before rushing out to acquire a car loan in Singapore to fulfil your needs for a sense of accomplishment (and convenience), there are several things to find out. 

The first question to ask is: How much will having a car cost you? If you are open to getting a car loan, you then need to know how to calculate car loan interest Singapore. 

What Do COE, OMV, And PARF Mean?

Before heading to the calculations of how to calculate car loan interest Singapore, it is important to define the major terms first: 

Certificate Of Entitlement (COE)

This refers to a document that grants you the right to own a car in Singapore. A COE is valid 10 years after which it must be renewed. It is compulsory for every car owner to have COE. 

The price you pay for this permit depends on the category of the vehicle, the number of bidders, and the value of the bids made. Vehicles are categorized into five groups. If the number of people applying for a given COE rises, the prices increase. 

The COE is designed to limit the number of cars on the road. 

Open Market Value (OMV)

This refers to the price you pay for a vehicle once it is imported into Singapore. This price constitutes the original manufacturing price, freight, insurance, and delivery. 

Preferential Additional Registration Fee (PARF)

The PARF is derived from the Additional Registration Fee (ARF). The ARF is the tax you pay after registering for your car. 

The PARF is the rebate one receives from the government for deregistering a car before it hits 10 years after the initial registration.  

How Much Can You Borrow For A Car Loan?

While you are entirely responsible for repaying your car loan, there are factors that affect how much you can borrow for a car loan. 

As Singapore’s central bank, the functions of the Monetary Authority of Singapore (MAS) go beyond printing money and enhancing price stability. 

The body has to cushion the economy from the consequences of poor financial decisions made by individuals and corporations. This is why MAS determines how much a Singaporean can borrow. 

Currently, MAS dictates that you cannot borrow more than 12 times of your monthly income. For example, if your monthly income stands at $1,000 per month, you cannot borrow $12,100. Even for a car. 

MAS has set different limitations for different types of borrowing. The body has capped car loans between 60% and 70% of the OMV. 

For cars with an OMV exceeding $20,000, the amount you can borrow is capped at 60%. Cars with an OMV of $20,000 or below have loans capped at 70%. 

Let’s explain the numbers. 

If you intend to buy a car whose OMV stands at $17,000, you cannot borrow above 70% of the vehicle’s total cost. 

The total cost refers to the OMV plus all taxes. Assuming that the total cost of the car is $80,000 after including the taxes. This means the maximum you can borrow is 70% of $80,000, which is $56,000. Therefore, you’ll have to pay $24,000 in cash as a downpayment.
     

How Long Should Your Car Loan Tenure Be?

A loan tenure refers to the time a lender allows you to service the loan plus the interest. In other words, it is the repayment period. 

The loan tenure is directly correlated with the interest you eventually pay. That is, the interest you’ll pay to the lending institution increases if the repayment period is longer. As such, it is crucial to ensure that the repayment period is as short as possible. 

For car loans in Singapore, calculations on how long a loan tenure should be are a bit different. Due to the COE, the maximum repayment period for a car loan is 10 years. This only applies to new cars that have never been used or registered before. 

But if you buy a car that is six years old, your maximum loan term is four years. So the car has only four years left. 

How To Use A Car Loan Calculator

Although you can do it manually, most people prefer to use a car loan calculator in determining the amount they’re required to pay. 

Using a car loan calculator helps you to avoid possible errors. Calculating the total repayment amount enables you to choose the best loan facility. 

Using a car loan calculator requires three essential details. Firstly, the cost of the car minus the downpayment. 

Secondly, the repayment period. Here, it is important to agree on a schedule that will not cause huge disruptions in your lifestyle. But it is also crucial to bear in mind that shorter loan tenures mean cheaper loans, and vice versa. 

Finally, the interest rate. Financial institutions rely on your credit score in setting the interest rate.  

After processing these three details, the calculator will show the principal, total interest, and monthly repayment amount. The principal accounts for the value of the car minus the sum paid as a downpayment. 

As long as you adhere to the repayment schedule, the amount assigned to interest will assume a reducing curve. 

Before applying for a car loan, it is advisable to ensure that you have the ability to repay within the agreed time frame. Also, ensure that you have a good credit score. 

If not, take the time to repair your creditworthiness before approaching a lender. Furthermore, ensure that you compare all available options before committing to a car loan.

Remember that banks make money from lending. So the more they can make from a single borrower, the better.  

How To Lower Your Car Loan Payment

Suppose you already have a car loan but are feeling the financial pinch. There are ways to go about lowering your payment. 

Refinancing Your Loan

If you obtained the loan with a poor credit rating, and have done your monthly payment consistently, you can take a new loan to service the old one. 

You can have a new loan with better interest rates than the other existing one. 

Talking To The Lender

If you can see signs that you’re likely to miss a payment, speak to your lender before that happens. Facing financial setbacks is way more common than most people think.

Letting your lender know early may help both parties to agree to reduce monthly payments. Or it may allow you to skip a payment without affecting your credit score.  

Sell The Car And Turn To Leasing

After selling, consider using a significant amount of the money gained to service the loan either fully or partially. 

Paying for a lease is way cheaper than the monthly payments for a “new” car. While you do not own the car you are leasing, you still have the means to move from point A to point B with ease. 

Another advantage of this approach is that you won’t need to pay for the car if you’re not using it. 

Saving For A Downpayment 

The amount paid as a downpayment goes a long way in the size of monthly repayments. So making a huge downpayment reduces the cost of the car loan by reducing the amount borrowed. 

Similarly, consider borrowing from friends and family to increase the downpayment instead of borrowing from the bank. Normally, your loved ones will not charge you interest.    

Other Factors To Consider

Affordability

Assess your financial position to ensure that you can afford the car you’ve chosen. For first-time car buyers, there is always the temptation to choose luxury over necessity. Ensure that your decision to buy a car is to make your life easier as opposed to showing off. 

Also, it is important to factor in the costs associated with owning a car. Some of these variables include road tax, parking, fueling, insurance, and maintenance. 

Expense Ratio

Buying a car should not bring your life to a standstill. The decision should not compromise other variables. For example, if you have to change your grocery budget to accommodate your car loan repayment, it is likely that the decision was flawed. 

To ensure that life continues normally, the monthly costs of owning a car should not exceed 20% of your monthly income. That is, if you make $10,000 a month, spending over $2,000 on the car would not be financially prudent. 

Ability To Repay After Losing Job

In the scenario that you lose your job before you are done servicing the car loan, would you be able to repay every remaining cent? The answer to this question can indicate your level of readiness in taking on a car loan. 

So ensure that you have up to six months of income saved for emergency purposes. With such a fund, you still have the time to secure new channels of income. 

Without this reserve stash, it would be impossible to avoid repossession and a big hit to your credit score.  

Where To Get A Car Loan

You now know how to calculate car loan interest Singapore. All you need is the right lender. 

When it comes to acquiring a car loan, there are two broad options: banks or auto dealers. 

On one hand, borrowing from banks affords you the chance to review multiple loan options. On the other hand, borrowing from auto dealers allows you the leverage to bargain on the price. 

Adding to the dilemma, auto dealers have higher interest rates and offer the balloon payment scheme. In contrast, banks offer lower interest rates than dealerships but have no balloon payment scheme. 

When deciding where to borrow, go for the option that affords the opportunity for the shortest loan tenure possible. Ensure there are no fees attached to early repayment.

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