For seven years, potential car owners have been lamenting about the high Certificate of Entitlement (COE) prices. COE even went as high as S$92,100 in January 2013. But at the beginning of September, Land Transport Authority announced that COE bidding exercise in the month of August ended at its seven-year low. The COE for cars up to 1,600cc and 97khw fell to S$36,100. The latest COE price for small cars follows a downward trend that has largely dominated the most part of the year. A much lower COE means that you can now own a new car for less than S$100,000.
If you are planning to get your next car while the COE price is low, you will need to get a loan. Between the choice of a personal loan and a car loan, which should you pick? Is there even any difference between the two?
Types of car loans
Before we dive into the comparison of car loans and personal loans, we need to first understand the types of car loans. In Singapore, there are four typical types of car loans:
- New car loan
- Used car loan
- Car loan refinancing
- Commercial car loan
As a private car owner, you should only be concerned with the first three loans. Commercial car loans are used by borrowers who want to purchase a car for commercial purpose. This includes taxi companies, company cars or even cars owned by Uber’s Lion City Rentals.
The most sought-after loans are new car loans. Banks in Singapore typically allow you to get a car loan to purchase a car straight from the dealer’s showroom. You do not have to head to the bank to get your loan approved before you head down to the car showroom. The process of getting a car loan has been streamlined to make it easier for you.
If you are planning to get a used car, you will need to know that banks do segregate used car and new car loans. There are several differences between a new car loan and used car loan. For used car loans, the car must meet the eligibility criterion of age. In addition, you might also need a guarantor to stand as security for the loan. There are, however, some banks that categorise used car loans and new car loans in the same category.
Loan amount and tenure
Under the new Monetary Authority of Singapore (MAS) rules, banks can finance up to 60% of the car’s purchase price. You will then need to fork out the rest of the purchase price from your own pocket.
However, if you were to take up a personal loan, you might face a problem. There is a limit to the amount you can borrow from the bank via a personal loan. For example, DBS only offers a maximum of four times your monthly salary. Unless you are earning $25,000 a month, you might not be able to get the required loan amount for your next car.
In terms of tenure, both personal loan and car loan offers a similar loan tenure of 1-7 years. Thus, from a tenure perspective, it puts both car loans and personal loans on par.
Interest rate: makes more sense to get a car loan
One of the starkest difference between a car loan and a personal loan is the interest rate payable on the loan. Most car loans have interest rates that hover around the average interest rate of 3%. The range of interest rate for car loans offered by banks in Singapore range between 2.18% to 3.875%.
Compared to car loans, personal loans have much higher interest rates. Interest on personal loan can range from 3.8% p.a. to 8.18% p.a. depending on how your loan package. This is because, unlike car loans, personal loans are unsecured loans. Since personal loans do not require any collateral, the bank has to charge higher interest rates to compensate for the risk they assume.
Personal loan is based your credit rating and how much the bank trusts in your ability to pay back the loan. If you end up defaulting on your loan, the bank does not have any collateral that they can use to claim back some losses.
Compared to personal loans, car loans are secured loans. This means that when a car loan is taken, your car is being used as a collateral. In the event that you default on your car loan, the bank has the right to confiscate the car. The bank can then put it up for auction to recover their money.
Getting a specific loan will cost you less
As a general rule of thumb, loans that are specific in nature tend to offer you better deals. This does not only apply to car loans, but also to housing loans or renovation loans. Thus, if you are reading this during your break at the car showroom, make the right decision to go with a car loan.