Add up the full cost of owning a car on a loan, including everything on top of the monthly instalment.
Take the monthly instalment from a car loan offer, or the S$1,125 figure from Lesson 5.1, and write it at the top of a page with room underneath for six more lines. The instalment is the number printed on the loan offer, so it is the one most people plan around. For many cars it is well short of what the car costs you each month, and it tells you nothing about what happens to the car's value while you are repaying the loan.
Daniel is buying a car on the S$60,000 loan from Lesson 5.1, Car loans: flat rates and MAS limits on loan size and tenure. When he tells his parents, his father, who has owned three cars, asks, "How much a month?" Daniel says S$1,125, which is his instalment. His father has asked the right question and accepted the wrong answer, but he laughs and points out, correctly, that S$1,125 is only the part the bank asks for.
Running costs are the costs of owning the car. They start on the day you collect it and carry on until you sell it. They are:
insurance, renewed every year road tax, paid to LTA season parking at home, and often at work as well ERP charges petrol or charging servicing and repairs, which go up as the car gets older
How much each one comes to depends on the car, where you live and park, and how you drive. Use real figures for the specific car you are looking at: insurance quotes, the road tax for that model from LTA's website, your HDB or condo season parking rate, and a realistic estimate of what you will spend on petrol. Estimates from forums are a poor substitute because they describe someone else's car and someone else's driving.
Daniel's insurance is about S$150 a month and his road tax about S$60 a month, both example figures, as are the rest of his numbers. Season parking is S$110 a month, ERP is S$40 a month and petrol is S$250 a month. Servicing comes to about S$80 a month when he averages it over the year.
His running costs are S$150 + S$60 + S$110 + S$40 + S$250 + S$80 = S$690 a month.
The full monthly cost is the instalment plus every running cost, with the loss in the car's value kept in mind beside it. For Daniel, while the loan runs, that is S$1,125 + S$690, or about S$1,815 a month, and the instalment is about 62% of it. If he had budgeted for the S$1,125 instalment only, he would be short by S$690 every month, starting from the first month he owns the car.
Every car in Singapore is tied to its COE, which lasts ten years. Each year of ownership uses up part of the COE, so the car is worth less each year. Near the end of the COE period, a large part of what the car is still worth can be the rebates paid when it is deregistered, and LTA sets out how these rebates are calculated.
A car loan is therefore a loan on something that loses value while you are paying for it. The loss never appears on a bill, but it is a real cost, and you notice it when you sell or scrap the car. Say Daniel's car costs S$100,000 and is worth about S$55,000 after five years. The S$45,000 of value he has lost, spread over 60 months, comes to about S$750 a month.
The MAS caps on loan size and tenure, covered in Lesson 5.1, exist partly for this reason. A long, high loan on a car that is losing value can leave the borrower owing more than the car would sell for.
When the instalment looks too high, dealers often suggest a longer tenure. It does lower the instalment, but it raises the total interest, because on a flat rate the interest is charged on the full loan amount for every extra year.
On Daniel's S$60,000 loan at 2.5% flat, a five-year tenure costs S$1,125 a month and S$7,500 in total interest. A seven-year tenure, if current MAS limits allow it for his car, costs about S$839 a month and S$10,500 in total interest, which is S$3,000 more. The EIR is about 4.7% for both tenures, so the extra cost comes almost entirely from borrowing for longer. A longer tenure also runs the loan further into the years when the car is worth less and when repairs cost more.
A bigger down payment works the other way, because borrowing less reduces both the interest and the instalment. If Daniel puts down S$10,000 more and borrows S$50,000 instead, at the same 2.5% flat over five years, his interest falls to S$6,250 and his instalment to S$937.50, a saving of S$1,250 in interest (S$7,500 - S$6,250).
What a bigger down payment costs you is the cash itself, which you can no longer use for anything else. If that S$10,000 is Daniel's emergency fund, he has swapped a small interest saving for a much bigger risk, such as a job loss or a medical bill with nothing set aside to cover it. At the same rate and tenure, a bigger down payment always saves interest, so the decision is whether the cash is truly spare once your emergency fund is in place. The Singapore personal finance system, lesson 3.1, How big your emergency fund should be, covers how much to keep before you spend savings on something like a down payment.
For a car you might buy, or a typical one if you are only thinking about it, you can build the same estimate. Get real figures for it: insurance quotes, the road tax for the model from LTA's website, your HDB or condo season parking rate, a realistic petrol estimate, and amounts for ERP and servicing. List each running cost as a monthly figure on the lines below your instalment, add them up, and then set the total beside the instalment alone, keeping the car's monthly loss in value in mind beside the full cost.
Estimate what a car you might buy would cost each month with every running cost included, then compare that figure with the instalment alone.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).