You will be able to read a car loan offer and know which limits and rates apply.
Daniel is 34, an engineer in Changi, and his second child is due in March. He and his wife have decided they need a car. At a showroom in Ubi, the salesperson writes three numbers on a card: the price, a loan of S$60,000, and a rate of 2.5%. "Very low," she says. "Lower than most banks." Daniel nods, because 2.5% does sound low. He doesn't yet know that in Singapore the size of that loan and how long it can run are capped by rules, or that 2.5% describes a loan whose real yearly cost is much closer to 5%.
Car loans look like personal loans, but they come with their own rules and their own habits. This lesson covers both.
In Singapore, MAS sets limits on motor vehicle loans. There is a cap on how much of the car's price you can borrow, which means a minimum down payment you must pay in cash, and a cap on the loan tenure, the number of years you can take to repay. The loan limit depends on the car's Open Market Value, or OMV, which is roughly the car's value before Singapore's taxes and the COE are added. Cars with a higher OMV face a tighter limit on how much can be borrowed.
MAS can and does revise these caps, so they are a look-it-up item. Before you visit a showroom, check the current motor vehicle loan limits on the MAS website, and ask the dealer for the OMV of the model you want. With those two, you can work out the largest loan anyone is allowed to offer you and the smallest down payment you will need.
The caps protect you in a blunt way. They stop anyone lending you most of the price of a car over a very long period, which would leave you owing more than the car is worth for years. They also mean a car needs a real cash down payment, and that cash comes from somewhere: your savings, your emergency fund, or money you had planned for something else.
Car loans in Singapore are usually quoted on a flat rate, the same way as the personal loans in lesson 3.1, Personal instalment loans: fixed payments on a flat rate. Interest is worked out once on the full loan for every year of the term, even though the balance falls each month.
Here is Daniel's quote with example figures. A loan of S$60,000 at 2.5% flat over five years carries interest of S$60,000 times 2.5% times 5, which is S$7,500. He repays S$67,500 over 60 months, so each instalment is S$1,125.
Using the RATE method from How money works: banks, interest, inflation and risk, lesson 3.4, Calculate the EIR of a flat rate offer with the RATE function, the EIR of this loan is about 4.7% a year. The salesperson's "very low" 2.5% and the 4.7% describe the same loan. The 4.7% is the one to compare with other offers, because only it reflects the falling balance.
That doesn't make the loan bad. A 4.7% EIR may compare well with other borrowing. The point is that you should compare 4.7% with 4.7%, and never 2.5% from one lender with an EIR from another.
You can usually finance a car in two ways. A bank or finance company can lend to you directly, or the dealer can arrange financing for you, often through a finance company or bank it works with. Dealer financing is convenient, because it is all done in the showroom on the day.
Convenience can come with costs that a direct bank loan does not have. A dealer-arranged loan may include an administration or processing fee, a requirement to buy insurance through the dealer, or a condition that ties a discount on the car to taking the dealer's loan. None of these is necessarily unfair, but each one changes the real cost. With an example processing fee of S$500 taken from the loan, Daniel's EIR rises from about 4.7% to about 5.1%, because he repays the same S$1,125 a month on less money.
A discount tied to the loan needs the most care. A lower car price looks like a saving, but if the loan that comes with it costs more than a bank loan would, the saving can disappear over five years. Compare the whole package: the price, the loan's EIR, the fees, and any conditions on insurance or early repayment.
Early repayment matters on car loans in particular. Because the interest is flat and calculated upfront, paying off early often comes with a charge, and you may not get back much of the interest. Read the terms.
Daniel did not sign at the showroom. He took the card home with the price, the loan amount, the tenure and the rate, and he asked the salesperson to email the full terms, including every fee. That is the right order: collect the numbers, convert them, and compare, all before any commitment.
With a real quote in hand, any quote, you can do the same. Write down the loan amount, the tenure, the flat rate and every fee, and put them into the EIR calculator you built in How money works.
Take one car loan quote, write down the loan amount, tenure, flat rate and fees, and convert it to an EIR.
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