Car Loans

When you buy a new car, calculate carefully what your loan amount , and also what the tenure of the loan should be, before going signing with the Dealer.

1.  There are guidelines to what you can borrow according to MAS guidelines - if OMV is less than $20k, you can borrow up to 70%. If OMV is above $20k, the quantum goes down to 60%.

2.  The dealer gets a cut from the Financial institutions when the loans are approved and disbursed. Hence the dealer will always try to get you to take the biggest loan possible. If you are not sure, it is better to apply for slightly lower than higher when you sign up with the dealer. There is fine print which usually states that if the buyer decides not to take a loan, or if he decides to lower the loan amount, he will have to pay a penalty to the dealer. This can be as much as 6-10% of the loan reduction!

3.  Tenure. The longer the tenure, the greater the interest you pay. Car loan rates appear low, but the effective rates are much higher. The reason is the car loan is computed based on simple interest rates, which means you continue to pay on the original loan amount even in the last year of loan repayment. For example, you take a $50k loan over 5 years, at interest rate of 3%. Installment is 50*(1+5*3%)/60 months = $958.33. Even after 4 years, you are still paying the same amount of installment - by this time, most of the loan has already been repaid.

Having the shortest possible tenure (according to your affordability) is probably the best!

Also, should you decide to sell the car before the loan tenure is up, you will have to pay interest of the years you have not yet incurred. This is called the rule of 78 - whereby the bank will calculate what interest rebate you get for those years (interest less rebate is still substantial!). The bank will also slap a penalty (20% perhaps) and possible some admin fee as well.

So, in short, do your sums before you sign up with the dealer. And read the fine print. When in doubt, take a smaller loan quantum for a shorter period. You can always increase the loan amount and tenure later but you can't reverse, i.e. decrease the loan amount.