Consider these factors before you sign that hire-purchase application
Vehicle Dollars and Sense PHOTO: TORQUE

Buying a car in Singapore is both exciting and nerve-racking, for the joy of having your own set of wheels is accompanied by the toil of paying for it by instalments. Before you sign on the dotted line, think carefully about these:


THE RIGHT MACHINE

Buy the vehicle you need and not the one you want, because the latter usually ends up costing you more than it’s worth. It doesn’t matter if you’re a petrolhead – if you have two toddlers, for instance, it’s
more practical to get a saloon instead of that sporty coupe you’ve been eyeing.

BUDGET CONSTRAINTS

According to a financial consultant who spoke to Torque, you should allocate no more than 35 per cent of your monthly income to servicing loans. Assuming that 20 per cent of your salary goes towards
your home mortgage, you’re left with just 15 per cent for your car loan. So if you draw $3,000 a month, your monthly car instalment shouldn’t exceed $450.

'HIDDEN' COSTS

These motoring-related expenses aren't obvious upfront, but defi nitely make a big impact on your wallet. Parking, petrol, road tax and motor insurance can be a drain on your finances. For example, year-long season parking in an HDB multi-storey carpark would cost $1,080 ($90 x 12 months). That sum alone is more than the annual road tax for a 1.6-litre petrol car.

TEN-YEAR TEMPTATION

Although it appears more affordable, choosing a 10-year, 100 per cent car loan is actually a decision you can ill afford. Zero downpayment means a larger loan quantum that takes longer to repay, and the total interest in the long run will be higher. Car buyers should also be aware
that longer loan tenures mean that their ride will be in negative equity for a longer period (see italicised story below).

STAYING POSITIVE
An automobile is said to be in "negative equity" when its residual value is less than the outstanding loan amount. Generally speaking, the break-even point for a 10-year, 100 per cent loan is between fi ve to seven years after the car is delivered. In contrast, a "partial" loan with a 30 per cent downpayment and a seven-year tenure normally reaches the break-even point after a three- to five-year instalment
repayment period.

Joe Chua, Head of Auto Business at Standard Chartered Bank in Singapore, recommends that car buyers opt for shorter repayment plans to reduce the risk of negative equity. He also reminds first-time car owners that settling their loan early (usually because they want to buy a brand new car) will incur a financial penalty. "An early loan completion means a reduction in interest income, so banks typically impose a charge to partially compensate for this loss."