Buying a car? Read this

Drawn by lower car prices and certificate of entitlement (COE) rates at record-low levels, potential buyers have been flooding showrooms to check out their dream set of wheels.

The buying frenzy was ignited on Nov 19, when the COE premium for cars with engine size up to 1,600cc crashed to $2, a level never seen before.

Said Ms Helen Neo, head of consumer banking at Maybank Singapore: 'With the Category A (below 1,600cc) COE at a record low of $2, new cars are currently priced at attractive levels.

'Furthermore, with the sharp plunge in petrol prices to a 20-month low, it is definitively a good time to consider buying a car.'

How does a lower COE contribute to savings for the buyer?

The fall in COE to $2 from $10,455 early this month has led many car dealers to cut car prices by between $3,000 and $6,000 for the smaller-car segment.

For instance, car dealer Borneo Motors has cut prices by up to $6,000, bringing its cheapest model, the Toyota Vios, to below $44,000.

Honda agent Kah Motor has cut the Civic's price by $2,700 to $72,500.

Motor Traders Association (MTA) president Tan Kheng Hwee said that car prices are lower today than at any other time in the last 10 years.

This can translate to lower monthly instalments too.

Ms Neo said that lower car prices mean that any loan taken is likely to be smaller too. Hence, the cost of financing would be correspondingly lower.

She gave this example: Let us say the car price was lowered by $5,000.

Assuming a corresponding reduction in loan amount by $5,000, this would translate into monthly savings of about $70 for a seven-year loan.

Besides the lower cost of financing, Ms Tan said that another reason to own a new car is that today's cars have improved features.

'Dollar for dollar, buyers today are also getting a superior product in terms of features and quality.'

For example, a new Honda Civic offers more space, better performance and higher horsepower, plus improved fuel economy compared to the last-generation Civic model, she added.

'And it costs less to buy today. It's a good deal.'

Still, you cannot ignore how the world is facing a prolonged financial downturn and the looming threat of more job cuts.

To add to the gloomy outlook, anecdotal evidence points to an emerging trend of bankruptcy arising from defaulting on car loans. Recent statistics also suggest a rising trend of cars being repossessed here because of loan defaults.

So, before you go ahead and book a car, consider these first:

1. Positive cash flow

Given the current economic conditions, Mr Tony Ong, director at IPP Financial Advisers, cautions potential car buyers to ensure that they have a positive cash flow for at least one to two years first.

This means an adequate cash flow to cater for living and household expenses and the servicing of the car loan.

Mr Leong Chin Huah, a senior consultant at wealth management firm Providend, said that as a guide, the total amount of your gross income that goes towards servicing all loans, and not just the car loan, should be capped at below 35 per cent. Avoid having to dip into your emergency funds.

2. Costs of owning a car

Mr Leong said consumers should consider other costs on top of the purchase price of the car.

These include the car loan (if you take up a loan), regular maintenance costs, fuel charges, road tax, insurance premium, Electronic Road Pricing (ERP) charges and parking fees.

He noted that while car taxes were reduced by about 15 per cent recently, there are also more ERP gantries being erected.

3. Needs versus wants

Ask yourself if you really need a car or is it just to pander to your desires. After all, it is a big-ticket item.

Ms Tan of the MTA said you should consider if you and your family are going to need a car for the next five to 10 years.

'If so, then this is a good time to buy when prices are at a historical low,' she said.

'Consider also that the COE quota will definitely be cut come April next year, so all other things being equal, car prices should trend up from here.'

4. Determining the type and size of car

IPP's Mr Ong suggests using your budget and potential usage of the car to help determine the type and size of car you should get.

5. Buying from an established firm

In these times, it is important to buy from an established company, be it cars or any big-ticket item, said Ms Tan. This is because you want to be sure that your deposit or down payment is safe.

In particular for cars, you want to be sure that the distributor that sold you the car will be around to deliver on promises on repair and warranty services down the road.

6. Should you choose the highest car loan available?

The advice from most financial experts is buyers should fork out a higher down payment if they can afford to, so as to reduce the amount of interest they have to pay.

This means that even if you can get a car loan of up to 100 per cent of the purchase price, do not go for it.

7. Find out the 'effective' loan interest rate

While it might make sense to take up a car loan, experts point out that many buyers are not aware that the 'effective' or real interest rate of a car loan works out to be higher than the published loan interest rate.

For example, a loan amount of $40,000 over seven years at a 2.5 per cent interest rate attracts an effective rate of about 4.8 per cent per annum.

This is because interest is payable on the original principal and not on a reducing principal, Mr Leong of Providend pointed out.

8. Check around for suitable loan packages

Loan packages vary, so buyers should take their time to suss out good deals.

The current economic climate has led to slower car sales, so car distributors are hungry for customers.

Market observers noted that current loan packages are about 3.35 per cent for a one- to six-year loan package and 3.5 per cent for a seven- to 10-year loan package.

At some car distributors, cash rebates are being offered when you take up a loan.

For instance, Malayan Motors, which distributes Jaguars and Bentleys, offers a cash rebate of 8 per cent of the loan. This means that for a $100,000 car loan, you will get $8,000 in cash.

At Kah Motor, the cash rebate is based on 30 per cent of the total loan interest. This works out to a $5,000 cash rebate for a $70,000 loan with a seven-year tenure.

However, consumers who wish to enjoy cash rebates should be aware that they have to refund the entire rebate if they wish to redeem their loans fully within the first two years. Loan interest rates for packages tied with cash rebates are also higher.

At Malayan Motors and Kah Motor, the cash rebate package comes with a higher 3.5 per cent per annum interest rate and a longer loan tenure of seven years and above.

On the other hand, those who do not wish to take the offer of a cash rebate can enjoy a lower interest rate of 2.28 per cent per annum at Malayan Motors and 2.2 per cent per annum at Kah Motor.

The latter offers 100 per cent financing, while Malayan Motors offers financing for up to 95 per cent of the cost of the car, subject to the bank's approval.

The bottom line: The choice of a suitable loan package depends on what you are comfortable paying each month.

9. What if you are an existing car owner - should you sell your car to get a new one?

Ms Tan said you should compare the depreciation of your current car and the terms of your current car loan to those of the new car you are considering.

Check the amount of outstanding loan payable, the resale price of your car and do your sums. Do note that new cars are also under warranty and maintenance costs tend to be lower.

In addition, Ms Neo suggested checking your existing car's COE and scrap rebate. The latter is also known as the Preferential Additional Registration Fee (Parf) rebate and it is the sum your existing car can fetch when it is de-registered.

'If the existing car has high COE and Parf rebates, which will translate into higher resale value of the car, it may be worthwhile to consider selling it off and switching to a new car,' she said.

You can check your rebates at the Land Transport Authority (LTA) website, by clicking on 'LTA e-Services', then 'online enquiries' and then 'Parf/COE rebate' and keying in the required information.

A higher resale value means you have more to channel towards the down payment of the new car.

Another factor to consider is the higher running cost of your existing car - due to lower petrol efficiency, higher servicing or maintenance costs and higher parts replacement costs due to wear and tear - compared to that of a new car.

However, it is generally not worthwhile switching to a new car if the existing car is less than a year old. As it is still very new, it would normally be within the warranty period of three years and running and maintenance costs will generally not be high. You won't enjoy much savings by switching.

10. Find out your new car's potential COE rebate

Singapore Vehicle Traders Association president Neo Nam Heng said consumers should be aware that if their new cars came with a $2 COE, the refund on the COE five years down the road will only be half that, or $1.

This applies even if the dealer has sold you a car that comes with an Open Category COE - which can be used for any vehicle type - of about $6,000.

This is because the LTA will base the rebate on the $2 COE, which is the lower of the two premiums.

'It is better to wait for the next COE bidding and bid for the actual Category A, so there will be no confusion leading to any potential disputes with your dealers,' he advised.


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