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Car Financing / Hire Purchase Loan

With the announcement from the Monetary Authority of Singapore (“MAS”) on 26 May 2016, we see a consequential increment in the loan-to-value (“LTV”) ratio, as a result of the increased loan tenor period.

Open Market Value of motor vehicle Maximum LTV* Maximum loan tenor
<= S$20,000

70%

(previously 60%)

7 years

(previously 5 years)

> S$20,000

60%

(previously 50%)

*LTV is the amount of the loan expressed as a percentage of the purchase price of the motor vehicle. The purchase price includes all relevant taxes and the price of COE.

In Singapore, hire purchase loan is made available in banks and auto dealerships (better known as in-house financing). However, not many people know where the differences lie, and which is the cheaper option? In the below article, we will break it down for you.

 

Bank Financing

As its name suggests, the bank financing option refers to the preferred bank offering a loan for potential clients who will in turn use the loan amount to purchase their desired vehicle. The loan amount provided by the bank will vary according to the LTV ratio and loan tenor. It should be noted that the agreed interest rate will be flat, and applicable throughout the whole tenor period.

 

In-house Financing

What really happens behind the in-house financing? I bet no auto dealer ever tells you so!

First and foremost, the dealer will approach the bank for a loan amount in lumpsum.

Then, when a client approaches the dealer for an in-house financing option, the dealer will present a customized solution for the financing. The solution is usually tailored to the terms and conditions set by the dealer. Normally, the in-house financing option comes with a higher interest rate than that offered by the banks, this is so as to cover the interest at which they loan from the banks. Alternatively, some dealers may also offer step-up interest rate solution to appeal to potential clients, which often come with low monthly installments too. However, one should note that there may be hidden fees applicable during prepayments and they should be declared and clarified prior acceptance of the loans.

Having said the above, which financing is cheaper and which option should you take up?

Let’s take an example for a car loan of S$50,000 with a loan tenor of 5 years.

Scenario 1: Bank financing with interest rate of 3% per annum.
Scenario 2: In-house financing with interest rate of 4% per annum
Scenario 3: In-house financing with step up interest rate of

Year 1: 2.5% per annum
Year 2: 3.0% per annum
Year 3: 3.5% per annum
Year 4: 4.0% per annum
Year 5: 4.5% per annum

 

Scenario 1 Scenario 2 Scenario 3
Principal

S$50,000

Tenor

5 years

Interest expenses:
– Year 1 S$50,000*3.0%

=S$1,500

S$50,000*4.0%

=S$2,000

S$50,000*2.5%

=S$1,250

– Year 2 S$1,500 S$2,000 S$50,000*3.0%

=S$1,500

– Year 3 S$1,500 S$2,000 S$50,000*3.5%

=S$1,750

– Year 4 S$1,500 S$2,000 S$50,000*4.0%

=S$2,000

– Year 5 S$1,500 S$2,000 S$50,000*4.5%

=S$2,250

Total Interest S$7,500 S$10,000 S$8,750
Principal + Total Interest S$57,500 S$60,000 S$58,750
Monthly installment** S$958 S$1,000 S$979

**Rounded to nearest dollar

As you may see from the above example, the most economical option for the client is the bank financing option. We like to encourage all buyers, to go through this process prior signing on the dotted lines. It is essential to work out the monthly installment to avoid running into cash-strap situation.

If you are still baffled by the figures and which financing option to take, we welcome you to approach us with any enquiry today.

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