Refinancing Car Loan Helps Relieve TDSR

Total Debt Servicing Ratio – often abbreviated as TDSR – this one loan assessment criteria often stops the banks from granting you further loans for any purchases or spending, whether for housing, renovation, car or any other purchase that requires financing. It stops banks from granting loans, even for customers with good credit bureau scores, as they have reached the upper limit of repayment set by the governing authority for responsible borrowing.

So, if you wish to take a loan and TDSR is the only reason stopping you for obtaining it, you may want to consider refinancing your car. Wait a minute, isn’t a car loan also a loan? Yes, but let’s take a first look at what TDSR is.

So How Is TDSR Calculated?

Total debt servicing ratio is calculated in this way:

TDS Ratio = [(Total Monthly Repayment Amount for All Loans/Gross Monthly Income) x 100 ]

Why multiply by 100? Because it is a ratio or percentage.

Example:

Mr Tan has and gross income of $10,000 monthly.

And his current monthly loan repayments include:

1. Housing loan of $2800 repayment per month
2. Car loan of $1852 repayment per month
3. Renovation loan of $600 repayment per month

Total monthly commitments total $5452

TDS Ratio = [($5252/$10,000) x 100 ] = 52.5%

To encourage responsible lending behavior from the banks as well as from customers, the MAS has set a maximum of 55% as the maximum debt ration allowable.

So, Can I Take Another Loan?

If we used the above example of Mr Tan, he can apply for and take up another loan where the monthly repayment does not exceed $250 to keep within the TDSR limit as set by the MAS. But what if he does need a loan of with a higher repayment amount than $250 per month, say for an education loan for a child going for her tertiary studies.

Without settling one of his outstanding loans in full, the only other option would be to take up a much lower loan amount for the education loan. Which may be insufficient.

This is where refinancing can ease the situation. And this is where we can help!

I Took A Short Car Loan Tenure And Its Now A Problem

Since interest on car loans is charged on a per year basis, many financially savvy Singaporeans choose a shorter car loan with less number of years in order to save interest on the repayment. And others may have made a higher down-payment amount in order to reduce the overall interest. This results in higher monthly repayment. While this may all and well been good in a steady financial situation, it may become uncomfortable when the employment situation changes, or new expenses come in which require additional funds.

Lets assume Mr Tan above is one such example. He put down a $70,000 for the car as down payment and only took a 4 year loan for the remaining $80,000 of which he has already paid 24 months. His outstanding loan now stands at about $44,500 for a two year old car.

If he takes car refinancing to lower his monthly repayments by stretching out the car loan outstanding to be paid over a longer time, his monthly installment would be greatly reduced.

Example:

If he chooses a 7 year loan for his $44,500 outstanding and the monthly will be reduced to only $633 at available current rates of 2.78%.

A reduction of $1219 per month!

TDSR is Now Reduced

Mr. Tan’s new monthly loan repayments will become:

1. Housing loan of $2800 repayment per month
2. New Car loan of $633 repayment per month
3. Renovation loan of $600 repayment per month

This makes his new TDSR = [($4033/$10,000) x 100 ] = 40.3%

And will allow Mr Tan to apply for another loan with monthly repayments up to $1467 per month before he hits the 55% TDSR.

Lower Loan Repayments And New Opportunities

Choices are now available to Mr Tan!

He is now able to either take on additional loans where he needs, or become more relaxed having more cash on hand monthly for other expenses as he is now paying a significantly lesser amount monthly for his car loan.

He may even be able to pay for his daughter’s tuition fees with the $1200+ per month cash freed up due to the lower car installments without taking the education loan.

Or if that is not enough, now that the TDSR is improved, he can still apply for and qualify for another loan for this purpose.

Freedom after refinancing!

The above is a Mr Tan is a fictional case used for illustration only. However, the financial numbers are very similar to a couple of car refinance cases we have done which have freed up funds for owners who wanted more funds for business opportunities, investment or simply to have a more relaxed monthly repayment of a lower amount.

For more queries on car refinancing and if this can be done for you in your situation, do feel free to drop us your name, contact and a brief description of your situation in the contact form on the right. Or call us at 92782880 during office hours.