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A loan again, naturally

SINGAPORE — “In God we trust,” goes the old saying. “All others pay cash.” Thankfully, that doesn’t apply to cars, which can be financed.

Motoring bliss awaits, but be sure to do your sums before heading to a showroom.

Motoring bliss awaits, but be sure to do your sums before heading to a showroom.

SINGAPORE — “In God we trust,” goes the old saying. “All others pay cash.” Thankfully, that doesn’t apply to cars, which can be financed.

And like any country, Singapore has regulations that govern borrowing, designed to protect borrower and lender alike.

The rules for cars are particularly strict, however, and were basically written to protect borrowers from themselves.

“The financing restrictions are necessary to encourage financial prudence among buyers of motor vehicles,” said a statement from the Monetary Authority of Singapore when the current loan regulations were implemented.

“In this prolonged environment of very low interest rates, there is greater risk of buyers over­extending themselves on motor vehicles.”

So how much can you actually afford to borrow, and by extension, what is your actual budget for a car?

It depends on two factors: How much cash you have upfront for a deposit, and how much you earn every month.

SHOW ME THE MONEY

For the downpayment, the first thing to check is the Open Market Value (OMV) of the car on your radar — that’s the price the dealer paid the factory for it, plus all the costs associated with shipping it here.

For cars with an OMV of up to S$20,000, you need a downpayment of at least 40 per cent, while anything above S$20,000 requires at least 50 per cent up front. The balance has to be paid off within five years.

Here’s a numerical example. A quintessential family saloon like the Toyota Corolla Altis starts at S$109,888 in price. Perfectly serviceable as a reliable means of family transport, the Altis requires a 40 per cent down payment, which works out to $43,956.

If you don’t have at least that amount in cash for a deposit, then it’s game over at this point.

But if you do, then the balance payments (with a current interest rate of 2.68 per cent) work out to S$1,247 a month for the next five years.

There’s the answer to the question of whether you can afford a Toyota Corolla Altis, then: If you have S$43,956 in cash and at least S$1,247 to spare every month, you can.

That’s the principle, at least. In practice, banks also have to assess your creditworthiness before deciding whether to loan you the money.

ARE YOU WORTHY?

Although there are no concrete rules about how much of your income you can use to comfortably service a car loan, banks here commonly use 20 to 40 per cent as a guide, said a loan processing officer from a local car distributor who declined to be named.

If you take home S$2,500 on payday, the most the banks are likely to feel you can comfortably spare is 40 per cent, or $1,000 a month, according to our expert.

But that amount assumes that you have no other debts to service — if you have a housing loan to pay or outstanding balances on your credit cards for instance, that will impact your ability to borrow for a car.

Likewise, it helps to have a clean credit history. Banks will check with one of two credit bureaus to see if you’ve missed a credit card payment or have somehow been a financial deadbeat.

If all is good on that front, you can work with a budget of 30 per cent of your monthly income as a realistic gauge of how much you can borrow to buy a car. Using that as a guide, that Toyota Corolla Altis and its S$1,247 monthly payment are within the budget of someone who earns a salary of S$4,157.

That said, if you don’t quite qualify for the loan or just miss out on the income threshold, there are ways to nudge the banks towards approval, said the loan officer we consulted.

Topping up the down payment to lower the monthly payment is one good way. Getting a guarantor (someone the banks can legally turn to for payment if you miss an instalment) can help to overturn a loan rejection, too.

LOAN SURVIVOR

But if the income numbers are in your favour, the loan application process isn’t a long and drawn-­out affair. All you need is proof of income (like computerised payslips or your latest Notice of Assessment from the Inland Revenue Authority of Singapore), and if the banks like what they see, car loans are usually approved in two days or less.

All that said, the entire rigmarole should be thought of as something designed to hamper those who need to borrow to buy a car, and weed out people who can’t comfortably afford one.

In other words, try not to be put off if your car loan application has been turned down for a car loan.

One thing worse than being rejected by a bank is to have your car repossessed by it.

CAN YOU DRIVE IT HOME?

Wondering if you can afford that new car? Here are the steps to figuring it out:

Step 1 — Find out its OMV, so you know if the minimum down payment is 40 per cent or 50 per cent.

Step 2 — See if you have enough cash for the down payment.

Step 3 — Ask the salesman to work out the monthly payment for you.

Step 4 — If the monthly repayment works out to 20 to 40 per cent of your salary, the banks are likely to say “yes”.

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