You will be able to add up the full cost of owning a car on a loan, beyond the monthly instalment.
When Daniel told his parents about the car, his father asked one question: "How much a month?" Daniel said S$1,125, the instalment from lesson 5.1. His father, who had owned three cars, laughed and said that was only the part the bank asks for.
He was right. The instalment is the number on the loan offer, so it is the number people plan around. For many cars it is well short of the full monthly cost, and it says nothing about what happens to the car's value while you are paying for it.
A car in Singapore comes with running costs that start on the day you collect it and do not stop until you sell it. Insurance is one, renewed every year. Road tax is another, paid to LTA. Then come season parking at home and often at work, ERP charges, petrol or charging, and servicing and repairs, which grow as the car ages.
Here is Daniel's estimate, with every figure made up for the example. Insurance works out at about S$150 a month, road tax about S$60, season parking S$110, ERP S$40, petrol S$250, and servicing about S$80 averaged over the year. That is S$690 a month in running costs.
Add the S$1,125 instalment and the car costs Daniel about S$1,815 a month while the loan runs. The instalment he quoted to his father is about 62% of that. If he had budgeted S$1,125 a month for the car, he would be short by S$690 every month from the first.
Your own running costs depend on the car, where you live and park, and how you drive. Insurance quotes, the road tax for the specific model on LTA's website, your HDB or condo season parking rate, and a realistic petrol estimate will get you close. Get real figures for the car you are considering. Estimates from a forum are a poor substitute.
A car in Singapore is tied to its COE, which runs for ten years. As the years pass, the car's value falls, because each year that goes by is a year of COE used up. Near the end of the COE period, a large part of what the car is still worth can be the rebates you get when it is deregistered, and LTA sets out how those are worked out.
So a car loan is a loan on an asset that loses value while you repay it. With example figures, if Daniel's car costs S$100,000 and is worth about S$55,000 after five years, it loses S$45,000 of value over that time. Spread across 60 months, that is about S$750 a month of value gone. It never appears on a bill, but it is as real as the petrol, and you notice it on the day you sell or scrap the car.
This is part of why the MAS caps from lesson 5.1, Car loans: flat rates and MAS limits on loan size and tenure, exist. A long, high loan on a car that is shrinking in value can leave you owing more than the car would sell for.
Dealers often suggest a longer tenure when the instalment looks too high. It does lower the monthly figure. It also raises the total interest, because on a flat rate the interest is charged on the full loan for every extra year.
With Daniel's example loan of S$60,000 at 2.5% flat, five years means S$1,125 a month and S$7,500 of interest. Stretch it to seven years, if the current MAS limits allow that for his car, and the instalment falls to about S$839, but total interest rises to S$10,500. That is S$3,000 more for a lower monthly number. The EIR barely changes, about 4.7% either way, so the extra cost comes almost entirely from borrowing for longer.
A longer tenure also means the loan runs further into the car's falling value, and further into the years when repairs start to cost more.
The opposite move is to put more cash down and borrow less. If Daniel pays S$10,000 more upfront and borrows S$50,000 instead, at the same 2.5% flat over five years, interest falls to S$6,250 and the instalment to S$937.50. He saves S$1,250 in interest.
The cost is the S$10,000 itself. Cash put into a car is no longer available for anything else. If that money was his emergency fund, he has swapped a small interest saving for a much bigger risk: a job loss or medical bill with nothing set aside to meet it. The Singapore personal finance system, lesson 3.1, How big your emergency fund should be, covers how much to keep before spending savings on anything like this.
A bigger down payment always saves interest on the same rate and tenure. What you have to decide is whether the cash you would use is truly spare once your emergency fund is in place.
Daniel's father asked the right question but accepted the wrong answer. The figure that matters is the full monthly cost: instalment plus every running cost, with the loss in value kept in mind beside it.
For a car you might buy, or a typical one if you are only thinking about it, you can build the same estimate. List each running cost as a monthly figure, add them up, and then set the total beside the instalment alone.
Estimate the monthly total cost of a car you might buy, including every running cost, and compare it with the instalment alone.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).