If you have a poor credit score, there is a possibility that the bank will lower your loan quantum. If your credit report reflects serious issues, such as a credit grade of C or a statement of default, it is possible that your loan application will be rejected altogether.
If you have poor credit or no credit history at all, you can build one up by taking small loans and paying them back responsibly. The easiest way to do this is to use a credit card, on which you always repay the full amount (there is no interest charged on credit cards if you make full repayment).
When you make a home loan application, be it from the bank or the Housing Development Board (HDB), your credit background will be checked, and having a car loan will negatively impact your Total Debt Servicing Ratio (TDSR).
Under the TDSR, loan repayments are capped at 60 per cent of your monthly income. This factors in all your loan obligations, including credit cards, personal loans, education loans, etc. A car loan at $946 a month, as explained above, would make up a significant portion of your TDSR, and restrict how much you can borrow for your house.
Note that you should not take a personal loan to pay the downpayment on your car.
Remember that a house is essential to living, whereas a car is not. Singapore is small and well-connected. Don’t end up getting a smaller home loan, and living in an uncomfortable situation for 15 to 20 years, just for the sake of a car, which will hardly last you up to 10.
Most car loans are priced at around 2 per cent to 3 per cent interest p.a., but be sure to compare all your options. Do not go for the first, most convenient offer. We know it’s boring to visit banks and talk about interest rates, but over seven years, even a difference of 0.5 per cent can result in significant cost differences.
If you do not know how to make comparisons, speak to other car owners or visit forums like sgCarMart for help. Be prepared to do the legwork, or be prepared to get ripped off! There is no advantage to taking a more expensive car loan.
4. WILL A CAR LOAN MAKE YOUR EXPENSE RATIO EXCEED 20 PER CENT?
Work out the expense ratio of your car. Overall, the monthly cost should not exceed 20 per cent of your monthly income. So if you earn S$7,000 per month, you should not be spending more than $1,400 a month on your car-related costs, inclusive of the loan.
Remember that besides the loan, your car incurs other expenses such as road tax, maintenance, car insurance, parking fees, Electronic Road Pricing (ERP) charges, petrol, and others.
You can save on many car-related costs with the right credit card, such as the Citi Cash Back Card. On top of cashback on groceries and dining, you also get up to 20.88 per cent savings at Esso and Shell, and 8 per cent cashback at other petrol stations. There’s also the POSB Everyday Card, which gives up to 20.1 per cent cashback at SPC.
5. ENSURE YOU CAN REPAY THE LOAN IF YOU EARN LESS OR LOSE YOUR JOB
Remember that it is not easy to sell a second-hand car at a good price. The value of a new car can depreciate by as much as 50 per cent to 60 per cent in the first year (depending on make, model, and market demand). If something goes wrong in the second or third year and you need to sell the car, you may not even recoup enough from the sale to pay off your remaining loan.
It is important to at least have a “buffer” period. Always ensure you have enough saved to repay the loan for another three to six months, even if your income is lost. This will give you time to find alternative income sources, or to offload the car at the best possible price.
Never take a car loan when you are living paycheque to paycheque. If you don’t have any savings, it’s best to assume you cannot afford the loan, even if you qualify for it on paper.