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Car Loan Restrictions in Singapore Have Been Lifted, So Should You Rush To Buy a Car Now?

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Peter Lin

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I love Steam sales. For the two of you living under a rock who don’t know what Steam is, it’s an online game distribution platform that regularly gives massive discounts for hundreds of games from your past and present. Yet, knowing I’ll never have the time to play any of them, I still keep buying games on Steam.

Why? Because they’re ridiculously cheap and so easy to obtain. Like the cars on Grand Theft Auto. And while getting a car in Singapore isn’t quite as easy as getting it in Rockstar Games’ hit series, it has gotten “cheaper” and easier in the past few days.

 

Buying a car in Singapore is cheap and easy? Don’t make me laugh…

Actually, it is! MAS announced last week that the car loan restrictions that were implemented slightly over three years ago have now been lifted. For cars with an OMV of $20,000 or less (that includes the Toyota Corolla Altis, the preferred car of Singaporeans), you can now take out a car loan of 70% of the purchase price, up from the previous 60%. And for cars with an OMV of more than $20,000, you can now take out a car loan of 60%, up from 50%.

Regardless of your car’s OMV, your loan can now be spread over 7 years instead of 5. Essentially, these changes mean that you can take out a bigger loan, and pay it over a longer time. In an ideal situation, this leads to you paying a lower downpayment as well as a lower monthly repayment amount.

 

So in other words, cars for all?!

It would seem like it, seeing how car dealers are being swarmed with crowds interested in getting a car. And why not? COE prices have dropped and petrol prices are still lower than last year. Owning a car has never been cheaper, so should we be getting one now? Well, I can think of 3 factors which would help you make your decision.

 

1. COE prices dropped for a reason

The whole reason why COE prices, especially for Category A, have been steadily dropping and are now staying below $50,000 is because it’s been so difficult to buy a car in the past three years. Not only were these restrictions in place, but COE quotas were also low, meaning that cars were only for those who could afford it. With downpayments as large as 40% to 50% of the purchase price, previously, demand for cars was beginning to dry up.

However, COE quotas have slowly begun to rise since the beginning of last year, with even more COEs expected as the year continues. That’s because we’re expecting thousands of cars to be de-registered after a 10-year span. So while demand for cars was still expected to be muted, more and more people would be expecting to replace their deregistered cars.

Now, with the new changes, downpayments are only 30% to 40% of the purchase price. When your car costs more than $100,000, that’s a $10,000 difference. That’s huge! This means that not only will there be buyers looking to replace their newly registered cars, but it may also entice those who had deregistered cars previously but were unable to buy a new one due to the restrictions.

Wait too long to buy a car, and it’s likely that this spike in demand would lead to a steady rise in COE prices. In fact, we can probably expect Category A prices to go increase beyond $50,000 for only the second time this year.

 

2. Petrol prices won’t stay low forever

Yes, oil prices have crashed to a crazy low unseen since 2009. But unlike 2009, when it was affected by the financial crisis, this time around it’s a result of oversupply due to major disagreements among oil-producing countries. In other words, it’s a human problem, not an oil problem. As soon as these disagreements are resolved, we can expect oil prices to stabilise, and then rise.

In fact, while it may be too early to say if it’s conclusive evidence of the end of low oil prices, they have been steadily rising since the year began. As a result, we could well be seeing the end of low petrol prices. The last thing you want is to buy a car, only to find that your petrol costs are increasing. Electric cars, anyone?

And no, even the best petrol credit card won’t help you. Much.

 

3. Taking a large car loan could impact your TDSR significantly

While car loan restrictions have been lifted, that doesn’t mean that other restrictions, meant to ensure that Singaporeans don’t take on too many financial liabilities, are going to be lifted. The Total Debt Servicing Ratio, or TDSR, for example, is still in place.

The TDSR ensures that your home loan, and by extension, the maximum cost of your property purchase, is limited by your outstanding debt. Currently, your outstanding debt repayments cannot exceed 60% of your monthly income. That definition of outstanding debt includes your credit card minimum payment and your personal loan payment. And yes, it includes car loan payments as well.

That means, if you only earn $5,000 a month, your total debt cannot exceed $3,000 each month. Assuming you have no other debts, if you take a car loan that costs you $1,000 each month, you only can set aside $2,000 for your housing purchase. That’s really not much.

 

But wait, doesn’t increasing the maximum car loan tenure from 5 years to 7 years mean that you can reduce your monthly repayment?

Yes, that’s absolutely right, but increasing your car loan tenure also means you’re going to pay more interest overall. Let’s look at an illustration. Say you take a $60,000 car loan over 5 years at an interest rate of 2.5% per year. Your monthly instalment is $1,125, and you end up paying $7,500 in total interest. Now, over 7 years at the same interest rate, your monthly instalment is $839, but you end up paying $10,500 altogether in interest alone.

So ask yourself, is reducing your car loan monthly repayment by about $300 a month really worth paying $3,000 more at the end of the loan?

 

So is it worthwhile to get a car now that the car loan restrictions have been lifted?

Yes, but only if you were planning to buy one even before the announcement. That’s because you would already have been financially prepared for a higher downpayment, and a higher monthly repayment. Now that the restrictions have been lifted, it just means you have more breathing room and you won’t need to tighten your belt too much. Plus, wait too long and the COE might end up increase significantly due to the higher demand.

If you couldn’t afford a car before the restrictions were lifted, on the other hand, you definitely shouldn’t get one even if you can now afford it. Those restrictions were there for a reason, and it was to ensure that Singaporeans didn’t take out a loan they would have difficulty repaying. As we pointed out above, it may not be worth reducing your monthly repayment if it means eventually paying more in the long run.

 

Are you planning to buy a car now that the loan restrictions have been lifted? Share your thoughts with us.

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Peter Lin

I am the poster boy for reinventing one's self. I've been a broadcast journalist, technical writer, banking customer service officer and a Catholic friar. My life experiences have made me the most cynical idealist you'll ever meet, which is why I'm also the co-founder of a local pop culture website. I believe ignorance is not bliss, and that money is the root of all evil only if you allow it to be.