You may have many unanswered questions, some of you may even have “bought” a car before on Hire Purchase Car Loan – also known as HP Loan – in Singapore, but did not really know the actual meaning of what a hire purchase entails.
Here are some questions you may have and the answers you may have been seeking.
Did I really buy the car?
Well yes, and no.
What you did, contractually speaking, as worded in the hire purchase agreement offered by most banks, is that you offered to hire with the aim of buying and owning the car, but since you did not pay the full purchase price of the car, the owner is actually the finance institution that accepted your offer for the goods (in this case a car) on a hire purchase basis. I.e.: you offered to buy, and they accepted your offer, but your purchase is complete and you become the owner only at the end of all the payments.
In the meantime, you are referred to as the “Hirer”. While the payments are being made on a monthly basis, the legal owner of the vehicle remains under the bank (E.g.: Maybank) or financing institution (E.g.: Hong Leong Finance).
In Singapore, the financing institution allows the registration of the car in the name of the Hirer – this means that will see yourself as owner on LTA records, but in fact the finance institution retains all legal right to the vehicle as long as the installment for payments are not yet completed.
So am I really just leasing the car?
No. In a lease, the title or ownership of the car remains with the leasing company even after payment of all the agreed amounts even till the end of the agreed time period or tenure. The company you lease from has no obligation to transfer the ownership to you at any time. Unless a further agreement is reached for you to purchase the car at an additional amount at the end of the lease, you will never be the owner of the car.
So if I’m not the owner why am I maintaining the car? The owner should pay all maintenance and taxes!
I believe this is the reason why the Owner (read the financing institution) allows the registration of the vehicle under your name – all taxes and maintenance are under your (the Hirer) care and cost. This is only fair as they charge only the interest they feel is fair, and by the way which you accepted when you signed on the document, only for coming up with the amount that they lent you for payment to the dealer who sold you the car. For that interest charge, it is not profitable if they cover the taxes and maintenance as well.
In a lease, more often than not, the owner would then take care of the maintenance, taxes and insurance of the vehicle, as the leasing companies are the registered owners.
However, in a bid to circumvent the MAS regulation for maximum loan quantum and loan duration, some companies have resorted to leases with customer who wished to purchase the car, but placed the burden of taxes, maintenance and insurance on the customer. These are contracts are non-standard and not the equivalent of a Hire Purchase and so do be aware when entering into them, and read the terms carefully.
So I still have to maintain the car…
Yes you do. And to keep it in good state of repair and legally free from any unauthorized modification. This is also a term and condition of the Hire Purchase. Should the vehicle be repossessed by the Owner due to default in payments, the repair cost may also be billed to the Hirer if vehicle is found to be in a poor state.
How is the interest calculated?
The interest for all HP loans in Singapore are quoted on an annual flat rate basis.
For example, if you are quoted 2.5% on the loan amount of $70,000, that means you pay 2.5% of the full amount in interest per year for the number of years you wish to take the loan for. The calculation is as follows:
Car purchase price: $100,000
Maximum allowable loan: $70,000 (0nly for cars less than $20,000 OMV – this is regulated by MAS)
Interest per year based on example of 2.5% rate = $70,000 x 2.5% = $1,750
So if you wished to take the loan for 7 years, total interest = $1,750 x 7 = $12,250
Full amount to be repaid in the 7 year period = $70,000 + $12,250 = $82,250
So if I want to reduce interest costs, I should take a shorter loan?
Yes, because you pay the quoted percentage of interest for every year that you want the loan for. The longer the loan the more interest you pay, but remember the longer the loan, the more affordable the monthly repayments would be, and vice versa, the less interest you pay on a short loan also means higher monthly installments. So work it out according to your budget and come to a budget friendly amount every month you think can be maintained easily for the duration of the loan.
Do look into any circumstances that you may encounter, such as a two income family suddenly losing one income for say up to six months. It’s always better to plan for contingencies. Being able to afford the installment now is one thing, being able to afford when an unexpected event occurs is another. If ypu no longer need the car in a tough situation, you may choose to sell it. Failing which, you may want to consider refinancing your car loan as a way out if you still need the use of the car to reduce the monthly repayments.
And what is my monthly repayment amount?
Your monthly repayment is the full amount to be paid, as calculated above, divided by the number of months of the loan tenure.
In the above example, the loan period is for 7 years and so a total of 7 x 12 = 84 months of installments payable.
The monthly is therefore calculated as $82,250 / 84 = $979.17.
But the bank does not charge me $979.17?
That’s true of most banks, they will round up the figure to $980 per month. Although one or two banks do charge to the cent every month and do not round up.
So they are charging me extra by rounding up?
No, they are not charging extra. All the extra cents they collected in advance will be added together, and will be deducted from the 84th installment amount. You will pay a lower amount on the last installment if your bank chooses to do a monthly rounding up.
Can I set my loan to start on date after my payday?
Most banks make the due date on the day of the month that your loan amount was disbursed to the seller of the car. If they made payment on the 10th of the month, that usually means your repayment will be on the 10th of each month. This date cannot be changed to another day of the month.
Why do I have to pay my first installment when I start the loan?
Yes, we understand you took the loan and then had to pay that first installment upfront, straightaway. It’s as if the bank did not lend you that money at all if they collected it right back again. But that is the financial practice and is standard practice for all HP loans. Is it fair? There is some basis for this method of operation, but I will not discuss it here save to say this practice is unlikely to change.
Does the above apply for a car refinancing situation too?
Yes, when you do a car refinancing with another HP loan, all the Hire Purchase terms and conditions still apply.
Why do I have to buy the more expensive comprehensive insurance when I take a loan?
In a HP loan, the car is the collateral of the loan and if the collateral is no longer around, the banks go to a full settlement scenario (payment of all outstanding) if the car is involved in an accident where it is beyond economical repair, or if it is stolen say when driven to Malaysia. No one is willing to continue to pay installments for a car that is no longer drive-able. This is where the insurance plays a part – all or most of the outstanding amount with the bank can be settled by the insurance so that there need not be a legal case between the Hirer and the Owner. Third party only insurance will not cover this and therefore finance institutions require Hirers (whom we often refer to as car buyers) to take on comprehensive coverage.
What if I want to sell my car and get another?
Assuming the HP tenure has not ended, when you wish to switch cars, you will first have to fully settle the Hire Purchase outstanding amount with the bank before selling or trading in for the next car. Why? Because only when you have settled all outstanding amounts are you the full legal owner of the vehicle – then you have the right to all amounts due to you from the sale, or trade in, of the vehicle. Do not worry, this is usually an easy process when the car distributorship, or a company like SG Cash N Cars, takes care of it for you.
How do they calculate what amount I need to pay to settle my loan?
You are probably wondering if the settlement amount is equal to the monthly repayment amount multiplied by the number of remaining months of the loan. No it is not, although you can probably use that as an estimate of what you need to pay for a simple financial working to decide on whether to sell and go to the next car.
Most banks regulated by MAS (I cannot say the same for all small finance companies or even money lenders) use something called the Rule of 78 for calculation of the full settlement amount. The good news for you is that there is an interest rebate you are supposed to get for settling the loan early, however, some banks retain a portion of this interest rebate and levy additional charges for early settlement.
I still want to know…
Feel free to contact us using the forms on the right of this page if you have a car loan you want to settle or do a financial transaction related to your car. We will get back to you shortly. Or feel free to call 92782880 during office hours Mondays to Fridays.