Q PLEASE advise on a checklist of important details to look out for when buying a car.
A First, ask yourself what type of car you have in mind and why? This will include a saloon, multi-purpose vehicle, weekend car and so forth.
Next, find out if you can afford the cost of owning the car you want. Consider the monthly car loan instalment, insurance premium, petrol costs, parking expenses, electronic road pricing, road tax, maintenance costs, excess in the event of an accident claim, and so on.
After that, think about how much you would like your down payment to be, and how many years you would like to take to pay off the loan.
The lower the down payment (which can be zero) and the longer the loan period (up to 10 years), the higher the total interest on the loan.
The higher the down payment, and the longer the loan period, the lower the monthly instalments.
Sometimes, the cash price is higher than the price offered with a car loan because the car dealer may get some financial benefit from a tie-up with the financial institution.
Find out the effective rate of the car loan, as most car loans are still quoted on a flat rate basis. The effective rate is roughly about double the flat rate. For example, a loan of $50,000 over seven years at a flat rate of 3.5 per cent with a monthly instalment of $741.08, is an effective interest rate of 6.44 per cent.
The terms and conditions will depend largely on the price of your car. If the price of the car, excluding the certificate of entitlement (COE), is less than or equal to $55,000, it will be governed by the Hire Purchase Act. If the price is above $55,000, the terms and conditions are governed by common law.
For the hire purchase car loan scheme, you are required to pay all principal and interest that would have accrued over the entire loan period. However, in the event you decide to repay the outstanding loan before the loan period ends, you will receive a rebate on the interest.
Ensure that you get a written approval from the financial institution for your loan. I have encountered a case of a car buyer whose verbal loan approval was withdrawn by the financial institution, resulting in him being made a bankrupt as his COE bid could not be cancelled. If you default on the loan, you and/or your guarantor may be made bankrupt.
Different financial institutions offer different loan rates and terms. For example, you can choose a fixed rate or variable rate loan. A fixed rate loan may be good if rates are at, say, historical lows, and perhaps a variable rate may be better if rates are at historical highs, and thus are expected to fall in due course.
Different insurance firms offer different motor insurance packages. For example, the premiums and excess for the driver, named drivers, young drivers; benefits; and terms and scope of cover, may differ. Some plans require assessments by independent damage assessment centres, others use authorised workshops.
Insurance plans to pay off the outstanding car loan in the event of death and/or permanent total disability, are typically more costly than including the loan amount in your decreasing term life insurance policy.
In addition, understand how the cost of owning a car can impact your other financial goals. For example, $1,000 monthly car expenses, which could be invested at 6 per cent from age 25 to 62, may mean $1.64 million less for retirement.
Leong Sze Hian
President
Society of Financial Service Profession
Advice provided in this column is not meant as a substitute for comprehensive professional advice. E-mail questions to a1admin@sph.com.sg.
