Cost of Car Ownership in Singapore
Many people embark on the quest for car ownership without realising the actual financial drain
that they are placing upon themselves.
Here are some of the factors that are part and parcel of car ownership.
FACTORS
(1) Monthly Installment
Conservative median average at $500/mth depending on loan duration.
The monthly installment for a car loan is calculated via the following formula.
{(Principal * Interest Rate * Loan Duration) + Principal} / Total No. of Months
(2) Insurance
Conservative median average at $1,800/year or $150/mth.
(3) Road Tax/Radio License
Approximately $700/year for 1500cc or $58/mth.
(4) Petrol
Approximately $200/mth.
(5) Maintenance
Approximately $60/mth on average over the lifespan of a car.
(6) Parking
Season parking, parking at workplace/carparks. Approximately $200/mth.
(7) ERP
Approximately $50/mth
(8) Incidents
Conservative estimate of $100/mth over the lifespan of the car. Factoring for "accidents",
upgrades, increased loading in insurance premium, etc.
Total
$500 + $150 + $58 + $200 + $60 + $200 + $50 + $100 = $1,318/mth for a 1,500cc car with a monthly installment of $500.
**Incidentally, a $70,000 amount compounded at a conservative rate of 4% per annum over 30 years is $227,000. At 8 % per annum, amount grows to $704,000.
CAR LOANS
(1) Rule of 78.
Car loan redemptions in Singapore are calculated using the
Rule of 78. It is a method of allocating a loan's
interest & principal. The rule applies most of the installment payments in the early years of the loan to payment of interest
rather than principal. At any point which you wish to redeem your loan, the remaining principal is the balance (outstanding
settlement amount). This is only applicable for cars whose total cost is < $55,000 excluding COE.
For cars over $55,000, it is subjected to another devious scheme known as Common Law.
There is an additional surcharge of 20% of the interest that the bank did not manage to earn.
(2) History.
Rule of 78 was popular as a short-hand method for calculating the remaining interest
on a loan in the days before financial calculators. In those early days, the rule of 78 was applied
to all loans. Today it remains only for car loans. In other countries,
like the US, the rule of 78 has been dropped. It is not permitted for car loans of more than 5 years
and it is rarely used for loans less than 5 years.
(3) Cash rebates.
Cash rebates are a promotional tool used by banks to overcome the 70%/80%/90% maximum
loan cap. It offers you cash upfront at the expense of higher interest rate. GE money was at one time
offering 12 months installment rebate at 6.XX% for 10 years.
That's almost double your principal! Cash rebate also comes with a lock in period
where you cannot sell your car or you are subject to a hefty penalty on top of usual charges.
This poses a problem when you need to sell your car or in event of a total car loss.
Should I pay more $ upfront or take a shorter loan?
This is entirely dependent on your profile. I'll show a few illustrations.
Case 1.
A) $70,000 loan for 5 years ($1,328 monthly)
B) 20% down & $56,000 loan for 7 years ($798 monthly)
If you intend to sell after 4 years.
A)
Full settlement amount - $15,523
Total installments paid - $63,744
Total cost - $79,267 ($15,523 + $63,744)
B)
Full settlement amount - $26,669
Total installments paid including $14,000 downpayment - $52,304
Total cost - $78,973 ($26,669 + $52,304)
If you intend to sell after 5 years.
A)
Full settlement amount - $0
Total installments paid - $79,625
Total cost - $79,625
B)
Full settlement amount - $18,224
Total installments paid including $14,000 downpayment - $61,880
Total cost - $80,104 ($18,224+ $61,880)
Case 2.
A) $70,000 loan for 7 years ($997 monthly)
B) 20% down & $56,000 loan for 10 years ($598 monthly)
If you intend to sell after 4 years.
A)
Full settlement amount - $33,327
Total installments paid - $47,856
Total cost - $81,183 ($33,327 + $47,856)
B)
Full settlement amount - $37,351
Total installments paid including $14,000 downpayment - $48,704
Total cost - $80,055 ($37,351 + $48,704)
If you intend to sell after 5 years.
A)
Full settlement amount - $22,772
Total installments paid - $59,820
Total cost - $82,592 ($22,772 + $59,820)
B)
Full settlement amount - $31,907
Total installments paid including $14,000 downpayment - $49,880
Total cost - $81,787 ($31,907 + $49,880)
*We can see that the upfront of 20% helps during the first 4-5 years where a person usually
sells their car. The savings costs is usually around $1,000.
*However $14,000 compounded at 4% for 4 years translate to $16,378 or a gain of $2,378.
*Even if its compounded at only 3% for 4 years, the gain is $1,757.
Of course, situations differ on a case by case basis.
It is always better to run your own numbers and determine which one suits you.
It is always my opinion that a short term loan is better than a large down payment and a longer term loan.
Always go for a short term loan. Your dealer makes less too.
"Break even" is subjective. Its normally termed as the date which your car valuation is greater
than your outstanding amount. In actual fact, you never break even. You always lose money on cars.
The value of a car is simply based on the laws of supply and demand. If your car is still in demand,
it'll fetch more than simply its paper + body value.
Demand can be accrued to a few things. eg; make/model, market supply, year of manufacture, color,
transmission type, etc...
Cars that do not have a strong demand locally are exported.
Certain countries have an age limit on the cars that can be imported in.
In Singapore, cars that are less than 3 years of age can be imported in and sold.
So in inverse, the number of countries that it can be exported to reduces as the age of the vehicle increases.
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