With the rising cost of the Certificate of Entitlement (COE) and stringent car loan measures making it even harder to purchase a new car, used cars are quickly becoming a more affordable alternative. Used cars not only cost up to 50% less than new cars, but your waiting time from the showroom to the highway is only a week compared to months for a new car.
Make a better buying decision by understanding the following cost factors:
Tighter Car Loan Restrictions
The Monetary Authority of Singapore (MAS) recently made it harder to afford a new car by introducing tighter car loan restrictions. With these measures, you’ll need to make larger down payments and monthly repayment. That’s because MAS reduced both loan tenures and the maximum Loan-to-Value (LTV) of every car loan, meaning you can expect to pay up to 50% down.
While the loan restrictions make it harder to buy a car, the lower cost of used cars should reduce your down payment and monthly repayments substantially.
Here’s a quick and simple version of the restrictions you’ll be facing:
- All car loan tenures are capped at 5 years
- If your vehicle’s Open Market Value (OMV) is $20,000 or less:
- Your maximum Loan-to-Value (LTV) is 60% of the purchase price (including taxes, fees, COE)
- Your Additional Registration Fee (ARF) is still equal to 100% of your vehicle’s OMV
- If your vehicle’s Open Market Value (OMV) is more than $20,000:
- Your maximum Loan-to-Value (LTV) is 50% of the purchase price (including taxes, fees, COE)
- Your Additional Registration Fee (ARF) is tiered to this formula: [100% for first $20,000], [140% on the next $30,000], and [180% on anything above $50,000]
Vehicle depreciation is how much “value” your car loses over a 10-year period – with only the “scrap” value remaining after that period. To calculate the yearly depreciation of a vehicle, MAS uses a straight-line depreciation method, meaning your car loses 10% of its OMV annually.
This is important because the OMV of a used car directly affects how much you can borrow.
A used car owner registered his BMW on 1 December 2009 with an OMV of $40,000. He then puts it up for sale on 31 August 2013.
He drove it for 47 months, leaving the car with 73 “unused” months remaining.
120 months (12 months X 10 years) – 47 months already used = 73 months remaining.
Divide the original OMV ($40,000) by 10 years (120 months) and multiply by the remaining months of usability (73) to find the remaining OMV.
$40,000 / 120 months X 73 months = $24,333.33 remaining OMV
So if you buy the car, you’ll only get a used car loan with an LTV limit of 50% because the BMW’s OMV is over $20,000. But if the same model had 60 months remaining, its depreciated value would be exactly $20,000, meaning you could get it with a used car loan with an LTV limit of 60%.
Choosing a PARF or COE Car
The price of used cars can differ greatly. That’s because the value of a used car is partially tied to the rebates that come with de-registering it – the Preferential Additional Registration Fee (PARF) and Certificate of Entitlement (COE) rebates.
Here’s the difference between the two:
- A PARF car hasn’t been de-registered before its 10-year depreciation period has ended. This makes it eligible for both the COE and PARF Rebate, which is ranges from 50% – 75% of the Additional Registration Fee (ARF) paid on the vehicle.
- A COE car is not eligible for the PARF Rebate because the owner chose to pay the Prevailing Quota Premium (PQP) for 5 or 10 more years more instead of de-registering the vehicle. This means that upon de-registration, you’ll only receive the COE Rebate.
Typically, PARF cars are more expensive than COE cars because they retain much of their OMV and COE, compared to a COE car, which is 10 years or older and only retains its COE rebate.
Outstanding Car Loan
If the PARF or COE car you’re purchasing has a loan attached, it means that the resale value will include the car’s outstanding loan amount. If that’s the case, you have two options:
- You can pay the seller directly the sale price minus the loan amount (Ex. $60,000 sale price – $35,000 outstanding loan = $25,000 up front). You can then take over the monthly loan repayments once the seller transfers the outstanding loan over to you.
- You can pay the sales price with the outstanding loan amount in full if you’ve got the means.
The Rule of 78
If you intend to purchase a used car with an outstanding loan attached, it’s a good idea to understand the Rule of 78 so you don’t overpay. Banks use the Rule of 78 whenever the original owner wants to fully repay or sell their car, requiring the payment of an interest rebate penalty.
Here’s an example of how the Rule of 78 is applied:
Total Interest Payable: $40,000 (Car Loan) X 2.88% (Interest Rate) X 5 years (Tenor) = $5,760
Monthly Payments: $40,000 + $5,760 / 60 months = $762.66
Loan Amount Already Paid: 25 (Monthly Repayments Made) X $762.66 = $19,067
Interest Rebate (Rule of 78): [35 Remaining Loan Repayments (35 +1)] / [60 Total Monthly Repayments (60 + 1)] X $5,760 (Total Interest Payable) = $1,983
Interest Rebate Penalty: 20% (Example Penalty) X $1,983 = $396.60
Total Loan Redemption Amount: $40,000 (Car Loan Amount) + $5,760 (Total Interest Payable – $19,067 (Loan Amount Already Paid) – $1,983 (Total Interest Payable) + $396.60 (Interest Rebate Penalty) = $25, 106.60
The Transfer Fee
You’ll need to pay a transfer fee if you want to register a used car in your name. Thankfully, the fee structure was changed to a flat fee of only $11. However, if the used car you’re buying is transferred to you between the 4th and 6th month after de-registration, you’ll need to pay an additional levy.
To check the transfer fee of your future vehicle, click here.
The Road Tax
Although the road tax doesn’t exactly factor into the initial cost of a used car, it has an effect on a car’s long-term cost. It’s an additional tax that’s calculated based on the engine size of your car – the larger the engine, the larger the fee. This tax applies to both new and used cars.
But if you buy a used car that’s more than 10 years old (COE Car), you’ll have to pay an additional road tax surcharge on top of the standard road tax.
Here’s the surcharge you’ll have to pay annually:
- Additional 10% of the Road Tax if your car is 10 years old
- Additional 20% of the Road Tax if your car is 11 years old
- Additional 30% of the Road Tax if your car is 12 years old
- Additional 40% of the Road Tax if your car is 13 years old
- Additional 50% of the Road Tax if your car is 14+ years old