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Ask the right questions about automobile loans

Ask the right questions about automobile loans
It is especially important to review interest rates, the length of the loan, extra fees and contract terms when buying a car, writes Richard Hartung. TODAY file photo
Published: 8:35 PM, September 9, 2017

Cars are expensive here, and many people take out a loan to buy one. While it might seem that most loans are similar, it’s important to look for the right loan and ask the right questions so you don’t pay too much.

BUYING A CAR

The first step is to figure whether you actually need a car and can afford it. With ride-sharing services such as Uber and Grab offering affordable alternatives, owning a car may not be as necessary as before.

If you do buy a car, paying for it may mean you have little left for other things you’d enjoy more. The cost of buying and maintaining a car may mean foregoing nice meals, relaxing vacations, and even retirement savings. It’s also important to remember that the car’s value decreases over time, so you’ll actually lose money every year.

The bottom line is that buying a car will have a major impact on your financial situation and you need to be prepared for it.

If you do decide to buy a car, it’s crucial to figure out what you can afford. While a Ferrari might seem attractive, buying a Hyundai may be more realistic. It’s important to calculate all your monthly expenses, and then decide how much you can manage to pay.

If you need a loan to buy a car, you’re not alone. With Credit Bureau Singapore (CBS) data showing that there were 244,488 car loan borrowers last year and Land Transport Authority (LTA) data showing that there were 504,160 private cars, it’s clear that many car owners do take out a loan.

CBS data also showed that car loans averaged S$65,868 in December, up 22 per cent from May last year when the Monetary Authority of Singapore (MAS) raised loan limits. The amount people can now borrow was increased to 70 per cent from 60 per cent of the price for cars with an open market value (OMV) of S$20,000 or less and to 60 percent from 50 per cent for buyers of cars with OMVs above S$20,000. The maximum loan duration was also increased to seven years from five years.

SHOP AROUND FOR YOUR CAR LOAN

While consumers often shop around for the best loan rate if they buy a house, car buyers tend to get a loan through the auto dealer. A key reason is that car dealers encourage buyers to take out a loan through an affiliated bank or from a credit company.

In the highly competitive auto industry, the rebate dealers receive for referring the loan is a large part of their profit. Dealers may lose money if buyers pay cash or get a loan elsewhere, so they refer buyers for a loan and may even add on a separate fee if the buyer doesn’t borrow. Some car buyers end up taking out a loan even if they don’t really need one.

One way to avoid taking up a car loan may be for buyers to buy directly from sellers or go online to avoid going through car dealers.

If you do take a car loan, it’s especially important to review interest rates, the length of the loan, extra fees and contract terms.

Buyers who have enough money for a down payment that meets MAS requirements can get a loan from a bank, with lower interest rates. While rates vary from about 2.7 to 3.0 per cent, the differences are often small and dealers may steer buyers to banks that offer higher rebates.

Buyers should still check comparison websites such as ValuePenguin or bankbazaar so they know current rates and can make sure their loan doesn’t cost too much. Consumers also shouldn’t be tempted by lower rates if the loan duration is longer than they want, since they may end up paying more interest in total. Car purchasers who can’t meet the MAS minimum may still be able to borrow from the dealer or a credit company. The interest rate can be significantly higher though, at about 4.8 to 5.4 per cent. Consumers who can’t afford the minimum down payment to get a bank loan may be better off selecting a less expensive car or not buying one at all.

And even though loans can be for up to seven years and the monthly payment is lower if the loan duration is longer, buyers who can take a shorter loan should do so in order to reduce interest costs.

Car owners who take out longer loans can still save money, though, by refinancing them. OCBC Bank offers a refinancing loan with an interest rate of 2.08 per cent, for instance, so car owners who are paying more could refinance and save money. You’ll need to check when you buy the car to make sure there’s no fee for paying off the loan early, since some companies charge an early repayment fee.

Buyers should also ask whether there is a processing fee for the purchase. Some dealers charge an extra fee of S$500 to S$1,500 and may only disclose it after the buyer signs the contract to purchase the car, which leads to unexpected extra costs.

ASKING QUESTIONS IS ESSENTIAL

If you do want to buy a car, then, the most important thing is to select a car you can actually afford. Beyond looking at that initial price, it’s also important to ask questions about the loan and contract so you can minimise your costs.