You will build a total cost sheet for a car comparing two loan structures.
Daniel now has two ways to pay for the same car. One keeps more cash in the bank and spreads the loan over five years. The other uses more of his savings, borrows less and clears the loan in three. The showroom presents them as two monthly instalments, and the lower one looks like the obvious pick. The real question is which one costs his family less over the years they will own the car, and whether they can afford the cash the cheaper one needs.
In this exercise you build a total cost sheet that answers it. Allow about 30 minutes. The worked example uses Daniel's car with figures made up for the example. If you are not buying a car, use a typical one so you have the sheet ready when you need it.
Set up two columns, one for each loan structure, with the same rows down the side. For each option, enter the car's price, the down payment, the loan amount, the tenure in years and the flat rate.
Daniel's example car costs S$100,000. Option A puts S$40,000 down and borrows S$60,000 over five years at 2.5% flat. Option B puts S$55,000 down and borrows S$45,000 over three years at the same 2.5% flat.
Before going further, check both options against the current MAS motor vehicle loan limits from lesson 5.1, Car loans: flat rates and MAS limits on loan size and tenure. If either loan is larger or longer than the rules allow for the car's OMV, no lender can offer it, and you need a different structure.
Use the same formulas as your EIR calculator from How money works: banks, interest, inflation and risk, lesson 3.4. Flat interest is the loan amount times the flat rate times the years. The instalment is the loan plus the flat interest, divided by the number of months. The EIR is =RATE(months,-instalment,loan)*12, using the amount you receive, so a processing fee taken from the loan raises it.
For Daniel's options, with no fees:
Option A has interest of S$60,000 times 2.5% times 5, which is S$7,500. The instalment is S$67,500 divided by 60, S$1,125, and the EIR is about 4.73%.
Option B has interest of S$45,000 times 2.5% times 3, which is S$3,375. The instalment is S$48,375 divided by 36, about S$1,343.75, and the EIR is about 4.76%.
The EIRs are almost identical, so neither loan is cheaper per dollar borrowed. The difference in cost comes from how much is borrowed and for how long. Option B pays S$4,125 less interest.
Add a row for monthly running costs: insurance, road tax, parking, ERP, petrol and servicing, as in lesson 5.2, What a car costs over the life of the loan. Daniel's example total is S$690 a month, the same under both options because it is the same car.
Then choose a period to compare over. The fair choice is the longer of the two loans, so both options are measured over the same years. For Daniel that is five years, or 60 months.
Add a row for the car's expected value at the end of that period. This is an estimate. Look at what similar cars of that age are selling for, and keep in mind that the value falls as the COE runs down. Daniel's example figure is S$55,000 after five years.
For each option, add up everything that leaves your pocket over the period, and take away what the car is worth at the end:
Option A comes to the S$40,000 down payment, plus S$67,500 of instalments, plus S$690 times 60, which is S$41,400 of running costs, minus the S$55,000 value at the end. That is S$93,900, or S$1,565 a month over 60 months.
Option B comes to S$55,000 down, plus S$48,375 of instalments, plus the same S$41,400, minus S$55,000. That is S$89,775, or about S$1,496 a month.
Option B costs about S$69 a month less over five years, which is the S$4,125 of interest saved, spread out. In return, it needs S$15,000 more cash on day one, and for the first three years Daniel pays about S$2,034 a month in instalment and running costs, against S$1,815 under Option A. After year three, Option B drops to the running costs alone.
Neither answer is right for everyone. Option B costs less in total, but only works if the extra S$15,000 is genuinely spare after the emergency fund, and if the family can carry the higher monthly figure for three years. Option A keeps more cash available and a lower monthly cost, at the price of S$4,125 more interest. How money works, lesson 7.1, Every dollar spent is a dollar not doing something else, is the right lens for the extra down payment: S$15,000 in the car is S$15,000 not doing anything else for those years.
A finished sheet has two columns with the price, down payment, loan, tenure, flat rate, EIR, instalment, total interest, monthly running costs, expected value at the end, and total cost of ownership per month over the same period. Under the columns sits one sentence naming the structure you would choose and the reason. Daniel wrote his. Yours uses a real car you are considering, or a typical one, and your own numbers.
Complete the sheet for a real car you are considering, or a typical one, and write which loan structure you would choose.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).