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Buyer beware - Loan rates in Singapore

ca-dreaming

ca-dreaming

Member
I wanted to start this thread to help out fellow car buyers on this thread. In the past few weeks I have been shopping around for cars and thus the loans that go with it. When I started getting quoted 2.8% and 2.28% rates, I thought to myself "WOW! My cost of capital is really low! I have to do the loan". Upon further investigation however I realize that the way they calculate the loan is based on FIXED rate. So let us use an example:

Loan of 100K at 2.8% for 5 years. The way it is calculated is that they take 2.8K (100x2.8%) and multiply by 5 years to give a total interest amt of 14K. Then they take the loan+interest (114K) and divide by number of months to get the monthly rate of $1900.

This may all make sense but if you bear in mind that then banks give you money they quote you APR (Annual % rate). When you translate this into APR the rate is actually 5.3%!!! :yikess:

When getting these rates please make sure that you are comparing apples to apples. If you are getting a loan rate of 5.3% APR and your savings rate is 0.5% APR then that is the real comparison. Do not compare the savings rate of 0.5% with the 2.8% to think that you are only paying 5-6 times the savings rate. You are actually paying over 10 times the savings rates.

So should you take the loan? First it depends on whether you can afford to pay cash. If you have the cash and if you can make more than 5.3% on the cash you have on the outside (e.g. stock market) then you should take this loan. If you cannot make more than 5.3% return on savings then you should pay cash for the car and consider this to be your return.

Hope this helps y'all in your future decisions!! Happy hunting!!
 
Re: Buyer beware - Loan rates in Singapore

Thanks for these infor. Does these imply to new cars too?
 
Re: Buyer beware - Loan rates in Singapore

i like Motorimage Subaru offer in house interest rate 2.08% , u will get it as long ut loan minimum $30,000 for minimum 3yrs.
 
Re: Buyer beware - Loan rates in Singapore

Yes. From what I understand, it applies to auto loans in general. I verified this with several independent dealers and banks who basically said the same thing. The term they use for these rates is FIXED RATE. So they will tell you that the FIXED RATE is 2.08%. What you need to ask them is what is the effective rate or APR. In most cases I suspect that they cannot tell you or dont know. So the best way to find out is to ask them for 3 inputs....loan amt, term (60months etc) and monthly payment. Then go to some internet auto loan calculator like

Auto loan calculator, car loan payment calculator by Bankrate

Use the same loan amount and term. Keep changing the interest rate till you get the same monthly payment and that will tell you your APR. Ofcourse you can reverse calculate this also if you are a finance type but this method it the easiest back-of-envelope calculation.
 
Re: Buyer beware - Loan rates in Singapore

But I suspect that even this motorimage rate of 2.08% is the fixed rate. When you get to a 7 year loan the APR will be close to 6%
 
Re: Buyer beware - Loan rates in Singapore

Informative thread. Stickied for easy reference.
 
Re: Buyer beware - Loan rates in Singapore

The APR as the name suggests is the ANNUAL PERCENTAGE RATE. The difference between the APR and Fixed rate method is that in FIXED MODE even if you are paying the principal they are charging you interest on the whole amount for the full term of the loan. Wheras in the APR mode as you make payments they will only calculate the interest based on how much more you owe.

APR
So let us say that the APR is 12% for a 100K loan over 6 months (For simplicity). That means that the monthly rate is 1% (12%/12). So in the first month you will pay interest of $1000 because 1% times $100000 = $1000. The principal works to $17255. This means that now you only have $83745 left. The next month interest is calculated based on this new amt so the interest will only be $837 or 1% of what is left. Here is what the rest of the payments look like:

Payment ($) 17255 17255 17255 17255 17255 17255
Principal Paid ($) 16255 16417 16582 16747 16915 17084
Interest Paid ($) 1000 837 673 507 340 171
Total Interest ($) 1000 1837 2511 3018 3358 3529
Balance ($) 83745 67328 50746 33999 17084 0

In FIXED mode you are paying inrest of 1% of the original loan amount of $100,000 so you will pay more in interest. (DAMN!!).
 
Re: Buyer beware - Loan rates in Singapore

satines;326759 said:
Isnt this the most common way of interest calculation for cars in Singapore since err...err...A VERY LONG TIME, alongside with rule 78 interest calculation.....
Click to expand...

yup... try telling the bank/loan company that their way of method is wrong and that you should be paying less interest as the principal sum is reduced... ha ha...

it's like telling the insurance company they shouldn't charge premium based the value of the car+coe but car only...

cheers
 
Re: Buyer beware - Loan rates in Singapore

i am assuming u r a foreigner....this has been the practise since i can remember. APR is also known as effect interest rate. car loans here r not like mortgage...which is call monthly reducing.

what i m gonna say may offend some people, but i firmly believe that if u hv to take a loan to buy a car..u cant afford it. there is only 1 exception; that is when u r convinced that u can beat the effective interest rate or APR. how many of you can say that?
 
Re: Buyer beware - Loan rates in Singapore

OP is probably a first time car buyer !

Even when i was working in the US / UK, similar interest rate calculation as well as rule of 78 applied.

But then again, cars are so cheap in the US/ UK, i paid cash in full for my rides so no need take loan.

In singapore, i think easily over 90% of car owners take loans, but i am not sure how many of them are actually aware of the loan calculation as well as the rule of 78
 
Re: Buyer beware - Loan rates in Singapore

totoseow said:
what i m gonna say may offend some people, but i firmly believe that if u hv to take a loan to buy a car..u cant afford it. there is only 1 exception; that is when u r convinced that u can beat the effective interest rate or APR. how many of you can say that?
Click to expand...
Disagree.

It boils down to the opportunity cost of the loan quantum.

Example - a $250K car. An 80% 5-year loan will incur a total interest payment of $28,000 at 2.8%. What could the the $200K have yielded? It depends on investable opportunities. Over the last three years, the yield of the $200K - from stock market or properties - could be enormous. Not saying an investment portfoilio of $200K is huge, or that $200K could buy a property, but given the margin nature of local investments, the return on the $200K is tremendous, if the owner has the investing acumen. Even a conservative portfolio would have earned an average of 4.5% - 5% dividend yield over the last 2 years, not taking capital gain into account.

The exception is a pocket so deep that $200K loan quantum seems so insignificant.

Of course, if the loan quantum has no opportunity cost, i.e. a prolonged poor investment environment with poor risk/reward ratio, then paying the full sum makes sense. However, who could time the investment environment? Given that most car buyers take a bigger appetite for cars only when things look good (no layman will commit more when they fear recession and retrenchment in the horizon), it always inherently means they will wanna keep cash and liquidity ahead of any investment opportunity. In that mental framework, leveraging on car purchases makes more sense that leveraging on any other investment - stock market, business, or properties.
 
Re: Buyer beware - Loan rates in Singapore

ken that is exactly what i m saying. how many people can u convince to go invest that 200k or leverage it to punt property? i doubt many will do that. instead they do not understand effective interest rate and focusing on the headline number of 2.8.

there r good debts n bad debts, n i do not think car loans here belong to the first category.
 
Re: Buyer beware - Loan rates in Singapore

seriously car loan in singapore is the most easy to calculate. just the term & condition like lock up period, minimum loan & period to enjoy low interest only ma.. if want cash back then go take high interest like 3.5% - 4.5%.
conclusion ,
if you have lump sum & high risk taker, take low interest car loan & invest the rest in market to leverage the car loan.
if you low risk, fully paid the car & dun think abt it.
my 5 cents onion...
 
Re: Buyer beware - Loan rates in Singapore

This was exactly my point. Most people refer to car loan and 3.5% in the same brearh as shown in the previous email. The point is that they should really be referring to the effective rate or the annual rate which can be as high as 6-7%!

Thanks for the warm welcome guys and great discussion
 
Re: Buyer beware - Loan rates in Singapore

hi all....

please note that most car loans offered in singapore are "hire purchase loans" and as such are administered under the hire purchase act.

it operates differently from a reducing balance loan which applies to home mortgages.

5.3% APR is considered cheap if you use the Prime Lending Rate as a comparative benchmark.

however, if one uses the deposit rate as a benchmark, you will realise that it might be better to borrow less and use more cash for a car purchase.

sadly enough, most car owners are more likely to be "hirers" than owners. it is almost equivalent to a lease than ownership.
 
Re: Buyer beware - Loan rates in Singapore

how many of us have access to prime rates?
 
Re: Buyer beware - Loan rates in Singapore

Can someone explain to me rule of 78?

This is some sort of prepayment penalty right?
 
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