Top 5 Car Loan Terms & Conditions That Can Cost You More Than Interest Rates
There is whole lot more to getting a car loan that you thought!
We do car loans and financing, and the most common question we get is “What is the interest rate?” It’s so common that the layman in the street thinks only about this factor, and nothing else – and we care about how we serve our customers, so we try to explain the other factors that could cost a customer more than, say a 0.3% difference on the loan interest rates could cost you.
We’ve done this so often that we decided to try to document it here, so that we can go into detail – because it’s not always possible to go into so many items in a short conversation. Let’s touch first on the most asked factor of a car loan – interest charged!
Many of the examples below, including the typical rates used for the calculated example, are with reference to COE renewal loans, but in general, the principles discussed here for car financing can apply for new car loans and any other hire purchase vehicle loan.
1. Interest Rates:
Why is there a big difference in car loan interest rates?
COE renewal loans at this point in time are going anywhere from 1.88% to 5.99% and we do all of these. That’s a big spread yes, but each loan rate comes with it’s own reasons for being at the rate that it is at, and the terms and conditions are different. so that they are still profitable for the car finance firms that offer them.
Typically speaking, new car loans are lower in rates than used cars which are, in turn, lower in interest rates than older cars past 10 years old (which is where COE renewal loans are at).
Super Low Rates – The Catch
For COE renewal, an example is the 1.88% rate, this is the lowest that you can find out there other than that 1.68% Google Ad which when you click on, goes to a website that only mentions 2.78% and you will not be able to find 1.68% anywhere there. The reason for this? It’s called click-bait, they get you to the site and then sell you something else, you will not get what you saw in the ad. And they have their fingers crossed you still call the number you see on the website. However, with such tactics being employed, I would strongly discourage you from trusting such a financial institution.
Slightly better than this is the 1.88% rate – this is actually a true claim, and finance houses will offer this rate, however, the catch is the tenure of the loan is 1 year. Imagine paying about $3000 each month for your COE renewal, if that is OK, then by all means yes! However, if you could save $3000 per months 12 months prior to the COE expiry, you could pay in cash – and so, no guesses for how many customers we get who will choose this option! We ever only had one!
And High Interest Rates, Why?
Logically, no one will chose a higher rate loan over a lower rate loan, correct? So those banks and finance companies asking for high rates should just close shop, they will have not business at all. Yet, why are they still open?
High rates mean you pay more for the loan, and the financing bank or in house company earns more – but typically this also means you get something you do not get from a low interest rate loan. What do you get?
Most important of all, is approval. Some customer of ours are not able to get approval for loans from banks (typically the strictest), but are able to get loans from in house finance companies that we work with, due to less stringent criteria they apply to grant approvals. Some are able also to grant loans without the need for income proof, which a number of our customers have approached us to help solve.
Second, you may get more favorable terms and conditions with a loan of slightly higher interest than one that is on the low end of the interest spectrum – which will cost less for you to terminate, should you wish to do early settlement. More on this later below.
And lastly, the loan amount. Typically, those lower interest COE renewal loans will only grant you the COE amount or a low loan amount, that is because loans that are relatively low are the most secure (from the viewpoint of the lender). So why would anyone go for a loan at 3.5% Maybank hire purchase car loan compared to at 2.98% Hong Leong Finance loan for COE renewed car? Because the one at 3.5% by Maybank will grant you an amount higher than the remaining COE value left in the car’s paper value whereas Hong Leong Finance will only give, at most, the COE paper value.
How Much Difference in Dollars is The Interest?
Let’s talk about the typical loans rates of 2.98% that is what most our customers apply at (as of October 2019) for a 5-7 year repayment for a 10 years COE renewal and a 4-5 year repayment for a 5 years COE renewal and compare it with the 2.78% rate that is available at some in house (we do not offer this as there are other terms which do not favor the customer – see more below)
|COE Cat A, |
|Loan at rate of||2.98%||2.78%||2.68%|
|Tenure of Loan (Years)|
|COE Cat A, |
|Loan at rate of||2.98%||2.78%||2.68%|
|Tenure of Loan (Years)|
|COE Cat B, |
|10 years renewal at rate of||2.98%||2.78%||2.68%|
|Tenure of Loan (Years)|
|COE Cat B, |
|5 years renewal at rate of||2.98%||2.78%||2.68%|
|Tenure of Loan (Years)|
The above table, you can see that the monthly repayment amount differs only by a few dollars a month for a 0.2% or 0.3% difference in interest rates. This is unlike housing loans where the amount loaned could be in millions. The smaller the loan amount, the smaller the monthly difference when rates are not the same.
For small figure loans such as hire purchase car loans, the monthly difference for Cat A using October 2019 PQP works out to $5.09 per month for 10 years renewal and 7 years loan and an even smaller $2.55 per month if you look at the 5 year renewal.
The 2.68% example is for comparison – each difference of 0.1% amounts to only $2.55 for Cat A 10 years renewal and even less $1.27 difference for a 5 years renewal full COE amount loan.
This means that while you may get one free kopi plus kaya toast per month if you did 10 years renewal, you may be charged a lot more if you are not fully aware of the other terms and conditions of the lower interest rate loans. You don’t even get the kaya toast if you only took a 5 years renewal.
So do look out for the other terms and conditions in a car loan!
2. Late Charges
Late Payment Interest
All finance companies charge late payment interest, and this is usually a percent rate of the outstanding overdue not paid, usually at a higher rate than the lower rate for the entire loan.
But not to worry, this part is only going to be a reasonable few dollars only, even if charged at 13% per annum (some in houses) for a few days that you forgot to pay, as long as you do not let it sit unpaid for too long. Some other banks and large finance companies charge at 9%+.
And some other in-house that charge not by percentage but are known to charge at a fixed rate of $50 per month (subject to revision), pro-rated to the number of days overdue.
And there are some finance that are very forgiving, not charging at all if the payment is not overdue for more than 3 days – find out from us which one!
Unsuccessful Giro Deduction Fee
This is a very reasonable $3.00 at some of the large finance houses, and up to $10.00 at some in houses we deal with.
Late Payment or Reminder Fee
The above late payment interest seems reasonable enough, even the higher charges are only a few dollars, usually less than $15 if you are late for no more than a week.
However, some in houses can be punitive with late reminders, and when you are late, they will call to remind and you will be charged a reminder fee of $80-$100. This part can get expensive and is in addition to late interest charges (based on how long you were late for) and is charged per late payment incident.
Yes, and you would want to know this, a number of banks/large finance institutions who charge the slightly higher rate do not have this charge at all!
3. Management Fees For Loan Default
This is only for those who run into trouble with repayment, so would not usually be applicable, but is of course, good to know, and be careful not to enter into such a situation.
In the event of loan default, the following will or may be applicable dependent upon the finance institution you are with. One point to note is that some may take action much sooner than others and consider a loan as distressed earlier.
Typically, large institutions may be more relaxed and risk averse small finance houses may take action sooner to tow the vehicle.
Repossession And Towing Fee
When a vehicle is towed or repossessed, the finding fee, also known as recovery fee, and towing fee is charged to the hirer of the loan. This can range from a few hundred to above $1000 in total, depending on the financial institution. In addition, if the repossession happens outside of Singapore, say if the vehicle is towed from Malaysia, additional fees up to $10,000 and above may apply.
After the vehicle is repossessed, the parking and storage fees will also be chargeable, and this can be at $40 to $50 per day for certain in houses but is at a lower and more reasonable rates at some others.
4. Finance Loading Fee
This is charged not by the car dealer but by the finance firms for processing the loan, banks only charge this to COE renewal cases or loans given to COE cars. New cars and PARF cars are usually not chaged this fee by the bank, however, Smaller finance companies may charge this processing fee even for loans to PARF cars or cars less than 10 years old as they usually take up more risk. Why more risk?
Smaller finance companies usually grant loans to cases which the banks may not approve, hence the additional risk. So they would charge, other than the higher interest rates, also an admin fee that can be called loading fee or processing fee.
Helpful tip: If you are purchasing a PARF car less than 10 years old, always go for a bank loan first, so that you can avoid this fee. Do not let the dealer apply to just any loan but make known you preference. We have had customers with good credit score come to us to refinance their loans who originally had in house loans “because that is what the dealer did for me”.
All loans to cars past 10 years are charged a finance loading fee, except for one finance company. Which one? Ask us when you apply for the loan!
5. Full Settlement Charges & Rebates
Full settlement happens when you end a car loan before the full term of the loan – that is, you did not make payment up to the end of the loan tenure.
Situations where this may happen are, most commonly, when you sell your car to upgrade to newer model. Or less common, when it is involved in an accident and needs to be scrapped or maybe it was stolen and cannot be found.
Changing cars happens very often, and statistically, a much smaller number of people will complete a long loan than compared to those who will do full settlement and end the loan early.
Rule of 78 Interest Rebate
When you end a loan early, you are supposed to receive back the interest for those years where the loan was not used – that is, the money borrowed was repaid and hence you should not be charged those years. But, typically, you do not receive the interest for those years back in full – the rebate on interest is calculated by a finance rule called the Rule of 78 and the formula goes like this:
Where u is the unearned interest they should refund, f is the total interest charged should the loan have been completed, k is the uncompleted number of months, and n is the total number of months in the original loan agreement.
What you would receive, if the finance institution follows the industry standard, is 80% of the interest rebate u calculated from above, and they keep 20% of it as their part for early termination. All banks follow this rule and you get back 80%.
However, small in house finance, and we know of at least one, which will give you back a grand total of $0.00! This means all the interest in the unused portion of the loan is totally confiscated! This can amount to thousands of dollars lost! So do check the reason why you are getting a lower interest rate! This finance company might be making money in a “by-left” way – money they should, by right, not be earning if the industry standard is followed.
This is one small difference in the loan agreement will make the couple of dollars difference from 0.2-0.3% per month seem insignificant and will overall cost much more for those who intend to change cars before the loan ends.
Interest In Lieu of Notice
Notice period for early settlement is usually one month, and in lieu of this notice, the finance institution also usually charges one additional month of interest, or rather they will calculate interest rebate above based on you settling one month after the actual settlement.
Early Settlement Processing Fee
In addition to the early settlement rebate described above that you are granted – or not granted, there is a administrative charge for the calculation and paperwork to terminate the loan and this is usually a percentage of either the initial loan amount or the outstanding loan payable.
This figure is usually at 1.5% or 2% and any higher would not be the usual. Probably not the banks, but we are not surprised there will be those who would charge more than this rate as their early settlement processing fee, so do watch out, it’s not the same across the board.
Needless to say, 1.5.% of initial loan amount can be higher than say 2% of the remaining outstanding balance to be paid. Initial loan amount does not change, but the remaining outstanding balance is reducing each month as you pay, and therefore gets lower as you reach closer to the end of the loan tenure.
So if you hold a loan longer before changing cars, a finance institution that charges the processing fee based on outstanding loan balance is more of an advantage than one that charges based on the initial loan amount.
We Are Here To Help Secure You A Good Car Loan
A loan agreement can be 25 pages thick, or more, so if you are unsure, please check carefully, or better still, ask us!
We charge an admin fee, like others, who help to process your car loan, the difference between us and others is we broker loans for different banks, large finance institutions and in houses and will explain to you which is better based on your individual situation.
However, if you are speaking with an in house loan company directly, you may not be offered other choices, and they will likely persuade you in the direction of taking their in house loan, without highlighting the differences between their loan and other loans.
Click here to find out more about our COE renewal loan, or feel free to call us at 92782880 during office hours or click on the WhatsApp chat for after office hours and we will get back to you soon as we can.