We've all heard about how buying a car is not one of the smartest financial moves to make. A car is after all, a depreciating asset. But we can't deny that having a car brings other intangible benefits - convenience, accessibility, freedom etc.
Damien Fong, from Singcapital Pte Ltd., tells potential car buyers what they need to know before signing on the dotted line for a new car purchase, and offers tips on how to source for a suitable car loan.
iFAST: What are the main factors to take into consideration when deciding whether to purchase a car?
DF: Many car owners around in the world, and especially in Singapore, do not have a full understanding of the financial implications of one's car purchase. In Singapore, it is important for a potential car buyer to note that there are some very specific factors that affect the value of a car and the overall cost of ownership. As Singapore is still one of the most expensive places in the world to buy and maintain a car, it is well worth one's time to understand the basic elements that make up the costs of owning a vehicle here.
OWNING A VEHICLE IN SINGAPORE
The 2 main factors that impact the cost of car ownership in Singapore are:
•The vehicle tax regime including import duties, additional registration fees (ARF) and road tax.
•The Vehicle Quota System which limits the vehicle population growth in Singapore to approximately 3% per annum. The tool which is used to limit the number of cars registered in Singapore is the Certificate of Entitlement or COE. Each vehicle registered in Singapore must have an accompanying COE which is "attached" to the vehicle throughout the vehicle's lifespan. For more information on the Vehicle Quota System and COEs, please visit www.lta.gov.sg (The Land Transport Authority) and www.onemotoring.com.sg.
RECURRING MAINTENANCE COSTS
In addition to incurring the cost of acquiring a vehicle, there are other costs associated with keeping the vehicle on the road. Here are some of those costs:
One of the most common misconceptions on the affordability of a car is the "low monthly installment" syndrome. This happens when prospective buyers are enticed into buying a car on the premise that the monthly installment is low. However, many consumers do not factor in other "costs" and can end up in a horrendous situation from a financial perspective.
Many car buyers also do not take enough time to consider their length of ownership and therefore do not make the best purchase decisions from a financial perspective. Unlike a property, a car is usually a liability as its value depreciates the moment you purchase the car. Therefore, when buying a car, it is important to take time to consider how much it will cost you overall, your intended ownership period and of course, your motoring needs.
iFAST: If an individual were to purchase a car, what would be the maximum percentage of the individual's salary that should be allocated for the monthly installments and other related expenses?
DF: To work out your Income and Expenses when deciding on a car purchase, one will need to work out his/her Debt Servicing Ratio (DSR) which is often used by banks to assess whether a loan application can be approved. DSR is the percentage of the borrower's total monthly financial commitment (including car loan, home loan repayment, and other financial commitments such as unsecured borrowing, etc) against his monthly income and it will determine the loan quantum to be granted. The acceptable DSR varies from bank to bank, but is usually between the region of 40% to 50%.
SOURCING FOR A SUITABLE CAR LOAN
There are three basic factors to think about when sourcing for a new car loan: interest rate, loan principal and loan period. Knowing these three items will enable you to understand how much loan you are able to obtain. Using these to make your loan calculation will help you establish your budget for making the monthly payments.
It will be good to bear in mind that most lenders will want you to take out as much loan as you can possibly afford, since they will make more money, the larger the loan amount is. Therefore, always check the terms and conditions for the car loan before you commit to a loan. Below are the key items one needs to take note of, when it comes to car loans.
The Loan Principal
Loan principal is a term used in finance that refers to the original amount of the debt or the original amount of money borrowed. Your total interest charges at the end of the loan period depend on the amount of the loan principal and the loan period. The higher the principal amount you borrow, the more money you will ultimately be paying back over the course of the loan.
The interest rate is usually expressed in percentage terms and is referred to as the amount of money charged outside the loan principal amount.
There are two common car loan interest schemes, i.e. the flat interest rate and the monthly rest schemes. Flat inter¬est charges are also known as "flat add-on rate". The interest rate is fixed throughout the loan period and it uses simple interest calculation. This means the total interest payable for the whole loan period is already added into the principal loan amount at the beginning. Borrowers pay equal monthly installments over the period of the loan. Currently, most car loans in Singapore are based on this scheme.
Monthly rest schemes are repayment schemes with floating interest rates. These rates are usually pegged at a certain percentage below or above a benchmark rate, such as the lender's prime lending rate or board rates. The interest is calculated on a monthly rest basis, meaning that the principal amount is reduced every month as the monthly installment is paid. The monthly instalments are a fixed amount, but the reduction in the principal and the interest payment vary according to changes in the interest rate.
The loan period refers to the life cycle of the loan. The longer the loan, the more expensive the loan will be.
Car loan calculation is an important part of sourcing for the right car loan. You can determine how much your loan is going to cost, by utilising good car loan calculation.
By regulation, car loans have a maximum repayment period of 10 years and a financing limit of 100% of the car purchase price or market value, including COE, whichever is lower. The loan period added to the age of the car cannot exceed 10 years.
Terms and Conditions - Default
For hire purchase loans, if you default on the monthly installments, the lender has the right to repossess the vehicle. Upon the sale of the vehicle, you have to pay for the shortfall between the sales proceeds and the loan outstanding, including the costs arising from the repossession.
Late Fees and Penalties
Different lenders charge different fees for late payment of installments. Make sure you check out all these fees before you commit to the loan.
iFAST Central provides services to more than 50 financial advisory companies, exempt financial advisers and financial institutions, and over 2,500 financial adviser representatives. Damien Fong is Financial Advisor Director at Singcapital Pte Ltd, a financial advisory company.