Car financing 101: Understanding loan eligibility

Unless you are really financially blessed, most of us tend to not have the liquid cash on hand to pay for our cars in full.

Most of us turn to car loans to finance our wheels - now isn't a bad time to actually seek one too, as interest rates have been lowered drastically as banks seek to tempt potential car buyers to take out a loan.

If you are a first-time car buyer, the legality and terminology involved may be a touch complex.

But fret not, we're here to break down that technical jargon into an easy-to-understand guide.

Understanding loan eligibility

When purchasing a car, you can seek finance options from one of two sources.

You can either apply for a bank loan (be it independently or through your dealer), or opt for an in-house loan if your dealer offers you that choice.

Typically, bank loans have lower interest rates than dealer loans. They are also governed more strictly than the latter and will affect your Total Debt Servicing Ratio (TDSR).

Bank loans

Buyers of cars with an Open-Market Value (OMV) of $20,000 or less will be allowed to loan up to 70 per cent of the final purchase price.

Buyers of cars with an OMV of $20,000 and up will only be allowed to loan up to 60 per cent of the purchase price.

The maximum loan tenure for a car loan is seven years, though the duration can be impacted by the remaining lifespan of a car (if you are buying used), as well as your risk profile.

Dealer loans

Dealer loans are subject to less scrutiny as it is less tightly regulated.

It is not uncommon to see Parallel Importers offering up to 100 per cent loans, with $0 downpayment for some of their offerings.

The terms are negotiable too, meaning you can ask for the tenure, interest and loan amount that best suits your needs.

You can also leverage on the Balloon Payment Scheme.

Quickly summed up, to calculate your total monthly repayment, the dealer will take the final selling price of your car, and subtract the PARF value of your vehicle.

The value is then divided by the number of months, and once the loan interest is factored in, that final figure is your monthly repayment.

This scheme affords you the luxury of lower monthly car payments, though you'll have to reimburse the PARF value to the dealer on your final instalment if you decide to renew the COE of your car.

However, dealer loans tend to have much higher interest rates, of up to 4.8 per cent per annum.

How do I apply for one?

We actually wrote an in-depth guide about the whole process here.

Essentially, you'll need to be able to provide proof of income, usually of about a 12- to 18-month period.

This can be obtained from IRAS, your CPF contributions or even computerised payslips from your employers.

Proof of identification, and of residence, will then be needed to process the paperwork too. The required documents will vary depending on the choice of financial institution, so do check before applying!

What to look out for

A fool-proof method of comparing loans is to look at their respective interest rates. The higher the interest rates, the more you pay over a period of time.

Juggle your down payment and loan tenure, as excessively long loan tenures mean your car would have cost you more.

Pay the maximum amount you are comfortable paying upfront to minimise the long-term financial penalty!

Do not be afraid to shop around and seek for alternative financial arrangements.

Do also note that the advertised rates you see online serve as a guide only - the actual interest rate you will get will vary based on your credit score!

Motorist's loan service

We have partnered with reputable financial institutions for a fuss-free car ownership experience.

Our competitive interest rates and paperwork support services will assist you in settling the loan for your current car (if you have one!), as well as applying for insurance, to ensure a seamless car handover process!

If you're seeking an alternative to your typical bank or dealer loan - look no further!

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This article was first published in Motorist.