With the Relaxed Car Loan Regulations, Singaporeans Would Be Crazy if They Took Up In-House Financing

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Have you heard of the acronym “FOMO”? It stands for “Fear of Missing Out”. It’s a legitimate fear – as evidenced by the hordes of Pokemon Go players rushing around to catch rare Lapras, Dragonite and Snorlax. Yes, the fear is real, and you can also find it in car buyers in Singapore, who have been heading in waves to showrooms ever since the car loan regulations were relaxed by MAS.


Remind me again what the car loan regulations are?

At the start of 2016, you could only take a loan of up to 60% of your car purchase price if your car’s Open Market Value (better known as OMV) is $20,000 or less. If the OMV was more than $20,000, then you could only loan up to 50% of the purchase price. Since the end of May, you can now loan up to 70% of your car purchase price if OMV is $20,000 or less and 60% if OMV is more than $20,000. That 10% difference is significant since it means that your initial downpayment for the car is now at least $10,000 less.

What’s probably had a bigger effect, is the extension of the car loan tenure from 5 years to 7 years. Although taking a longer loan usually means that you end up paying more in interest, it also has the effect of reducing monthly repayments by at least $200. That makes a pretty big difference to your cashflow, with less pressure on your monthly expenses.


How has relaxing the car loan regulations affected car buyers and dealers?

For one thing, the fact that it’s easier on the wallet to buy a car means there are now more car buyers than before. In the past two COE bidding exercises, there have been about 4,000 bids for COE in Category A alone, up from 3,000 earlier in the year. However, the higher demand for cars has naturally led to a spike in COE prices. In June, Category A prices have shot up past the $50,000 mark for the first time since January this year and hit a peak of $55,200.

Still, the increase in customers is great news for new and used car dealers, who have been complaining that business has been getting slower since the old car loan regulations were introduced in 2013. For some dealers, however, the timing of the MAS announcement works against them in the short-term.

Because of deals with car importers made before the announcement, car dealers may end up selling cars at prices below what they originally intended to. This may lead them to try to recoup their losses through other means, such as in-house car financing.


What is in-house financing?

Many dealers have established partnerships with financial institutions to give you special car loan rates, presumably with lower interest rates than those offered by banks. In many cases, they sweeten the deal by offering ways to skirt the car loan regulations, for example, by artificially inflating the purchase price so that you pay a smaller downpayment in a method called overtrade.

But with the car loan regulations now relaxed, do you really need that in-house financing? Let’s compare two scenarios when buying the same car – Singapore’s most popular car model of 2015, the Toyota Corolla Altis. A new model should cost about $115,000.


Scenario 1: Regular Bank Loan

Your purchase price is $115,000. Since the OMV is less than $20,000, your downpayment needs only to be 30% of that, or $34,500.

The loan amount is $80,500 or 70% of the purchase price. You get a competitive bank loan interest rate of 2.78% per year. If you take the car loan for 7 years, this will make your monthly instalment $1,145 and a total interest payment of $15,665.

Altogether, your new car costing $115,000 would’ve cost you a total of $34,500 + $80,500 + $15,665 = $130,665.


Scenario 2: In-house Financing

Dealer artificially inflates the car cost by $10,000 to $125,000. Since the OMV is less than $20,000, your downpayment needs only to be 30% of that, or $37,500. But because of the overtrade, your actual downpayment is only $27,500. That’s great, right? Well, let’s see how it affects the actual loan.

The loan amount is now $87,500, or 70% of $125,000. The dealer says you HAVE to take a loan from their preferred bank. The loan interest rate they offer is 2.88% per year, slightly higher than a regular bank loan, but hey, you didn’t have to pay as much for your downpayment!

If you take the car loan for 7 years, this will make your monthly instalment $1,252 and you would’ve paid a total interest of $17,640.

Altogether, your new car costing $115,000 would’ve cost you a total of $27,500 + $87,500 + $17,640 = $132,640.


What do these numbers mean?

Essentially, getting in-house financing with the overtrade method means while you pay $7,000 less downpayment at first, but end up paying $107 more each month because of the higher loan amount, and a total of $1,975 more in interest after 7 years.

Is the difference of “saving” $7,000 in downpayment significant? Perhaps. But with the relaxed car loan regulations, your downpayment can be as low as $34,500. And if you can’t even come up with that amount in cash, maybe you shouldn’t be buying a car.


But what if you could get an even cheaper car loan?

So far, what we’ve talked about are the kind of bank loans and in-house car loans that you can expect from car dealers, but have you heard of direct car loans? These are loans from banks that have significantly lower interest rates than most other financing options. How are banks able to offer a lower rate? By avoiding paying car dealers their commission on each car loan.

However, car dealers have fine-tuned their strategies when it comes to processing car loans. Not only do they help make it easier for customers to handle their car loans, but dealers often offer enticing freebies when you sign up through them. As a result, banks have often found difficulty in competing with dealers. Nonetheless, every now and then, a bank will try to win customers over by offering a lower interest rate.

If you’re looking for such a bargain, compare current car loan interest rates with MoneySmart. We’ll tell you which bank is offering the lowest car loan interest rates.


Are you planning to buy a new car? What factors are you using to make your decision? Share them with us.