Update: Do also read the updated article I wrote here in 2014: How to buy a used car in Singapore
Ever since my two test drive posts I’ve had a few friends contact me about buying a car. I think it’s best that I share it on a blog post so it benefits many others who are considering to buy a car in Singapore.
Disclaimer: Buying a car in Singapore is mainly a lifestyle decision, and also a big financial decision. There’s never a right or wrong time to buy a car. If you need one, just go for it, but make sure you do your finances right.
Singapore’s Vehicle Tax Structure
The tax structure in Singapore makes car buying/financing a pretty complicated process.
The first thing to know is what makes up a vehicle’s price in Singapore:
+--------------------------------+
| OMV | ARF | COE | Profit | GST |= Total price of car
+--------------------------------+
GST, or Goods and Services Tax is a tax on the purchase value of goods or services in Singapore. I think this one is the easiest to understand. Right now this amount is at 7% of sale price.
OMV, or Open Market Value is the declared value of the car. One can consider this the cost of the dealer importing the car.
ARF, or Additional Registration Fee is a form of import tax. As of March 2008, the ARF is 100% of OMV. Prior to that it was 110%.
COE, or Certificate of Entitlement is also a form of tax that grants the owner a right to use the vehicle for a period of 10 years. COE prices are controlled by market forces based on supply and demand and is broken into several categories based on vehicle type and engine capacity. The amount paid is known as a Quota Premium (“QP”).
As of now, Cat A QP (cars 1600cc and below) is somewhere near $47,000. I think most of the readers know this.
Of course, finally there’s the profit and other miscellaneous costs such as registration fees which are pretty negligible in ratio to the final selling price of a vehicle in Singapore.
Now, it is important that one understands the tax structure first before moving on to the next part.
Singapore’s Vehicle Renewal Scheme
Ever wondered why most vehicles in Singapore are new and shiny? That’s because of how the Singapore government encourages renewal of cars by offering tax refunds when one deregisters a car!
This is when you see terms like PARF (Preferential ARF?) rebate. Basically this is a tax refund scheme that reduces in value over a period of 10 years. For the 1st to 4th year, the government grants a 75% refund of the ARF if a car is deregistered. Every subsequent year thereafter, this amount drops by 5%.
Once the car reaches its 10th year, no refund (0%) is given.
1st to 4th year, before reaching 5th year = 75%
5th year, before reaching 6th year = 70%
6th year, before reaching 7th year = 65%
7th year, before reaching 8th year = 60%
8th year, before reaching 9th year = 55%
9th year, before reaching 10th year = 50%
10th year and beyond = 0%
The same goes for COE refunds, but in a linear fashion. COE refunds reduce on a daily basis, so as each day passes, the refund amount reduces in a straight line until the end of 10 years where it will be 0%.
Having understood the tax refund (aka “rebate”) structure, we now come to a term that car dealers like to use to confuse you – paper value.
The oh-so-familiar term “paper value” basically refers to the amount of refundable tax on a car. In other words, it is an amount of money the dealer will certainly get from the government when deregistering the car.
What they do NOT tell you is that your car still has a worth. Look at this chart again:
+--------------------------------+
| OMV | ARF | COE | Profit | GST |= Total price of car
+--------------------------------+
Paper value is a refund of ARF (tax) + COE (tax). What happened to the OMV, or more appropriately, the worth of the car? Ah-ha! They have suckered you into trading in your car for a low “paper value”, and then exported your shiny new car to another country for resale at a pretty decent profit!
Remember, our country is small. Our annual car mileages are relatively low and Singapore cars are well taken care of. A lot of countries favour cars exported from Singapore. Don’t let the dealers bullshit you into believing otherwise.
Understanding Depreciation
So what is depreciation? It is basically the financial costs of a car after tax refunds, over a period of utilization.
Remember the tax refund scheme? You could still get a 50% ARF refund at the 9th year just a few days before the car reaches exactly 10 years of age. This amount is known as the minimum PARF benefit.
Therefore assuming one drives the car for the whole 10 years, the annual cost of financing a car is [(Purchase Price – Minimum PARF benefit)/10 years]. This is known as the annual depreciation.
Why is Depreciation Important?
Depreciation is fundamental to knowing the long-term affordability of almost anything, especially physical goods. Your house, your car, your computer, etc. Everything has a lifespan.
By understanding depreciation, you will also be able to better know if your financial decision is sound and if you are able to cut loss in a dire situation, which brings me to my next section.
Financing a Car and Overtrades
Many people make a financial decision to buy a car only asking one thing: “How much do I pay each month?”
This was my biggest mistake when I bought my first new car; I hope it won’t be yours.
The monthly cost is just part of the affordability equation. The next part of the question is: “If I need to sell my car, will I have any outstanding loans?”
You must be thinking now, “what do you mean ‘outstanding loans’?”
Don’t forget – you took a loan. Assuming you didn’t pay a single cent initially as downpayment, the bank charges you lots of interest for that. Now that you’re selling your car, are you able to pay off the total amount you owe the bank (called the settlement amount) from the proceeds of your car sale?
This is quite hard to understand now, so I’ll use an example.
Let’s just say I bought a car for $100,000. Round figures are easy to work with.
I took a 10 year loan. The loan interest rate is now 1.88%.
Interest: $100,000 * 1.88% * 10 years = $18,800
Total: $100,000 + $18,800 = $118,800
Monthly: $118,800 / (10 years * 12 months) = $990
So I owe the bank $18,800 in interests even before I drove the car!
Now, assuming I drove the car for 3 years and I decided to sell it. I still owe the bank the following according to the Rule of 72:
Amount Paid: $990 * 3 years * 12 months = $35,640
Balance: $118,800 – $35,640 = $83,160
Rule of 72 rebate: Complex formula, etc. = $9,245
20% Penalty: $9,245 * 20% = $1,849
Settlement: $83,160 – $9,245 + $1,849 = $75,764
The real truth is that after 3 years my car would probably sell for only $65,000, So I still need to “top up” $10,764. As the car ages, this value might get lesser.
At one point, you may be able to sell your car for as much as the settlement amount. Some people call this breaking even, i.e. you owe the bank as much as you sold the car for.
A lot of people kill themselves here because they took way too much loan. When time comes that they desperately need to sell the car to relief themselves of a monthly burden, they are stuck in a situation where they are not able to pay off the outstanding loan.
As an end result, most people sell their cars and buy yet another car – likely a cheaper and older car and bundle this outstanding loan into a new loan. This is called overtrade. Overtrades are the worst thing you can do – to take a loan on top of a loan. Don’t ever do that!
Are loans that bad? Should I take a loan?
Why not? Loans are healthy financial instruments if managed properly. The key here is to plan for an exit. My general advise is to downpay at least the dealer’s profit and part of the OMV since tax is a refundable portion. This way, you’re taking a loan on a guaranteed sum! This formula has never gone wrong on me so far.
Financing Tips
The best way to reduce your loan interest is to shorten the loan term. If you are taking a $100,000 loan at the prevailing interest rate of 1.88% for 10 years, that’s $18,800 of interests! Shortening your loan from 10 years to 7 years would reduce this amount to $13,160. That’s a reduction in $5,640 of interests.
Downpayment is useful if you intend to sell your car SOON as it reduces the principal sum. But downpayment does not really reduce interests that much.
Using the above example, if I down pay $20,000 and take $80,000 in loan for 10 years, I’ll still pay $15,040 in interests. That’s still more interests than reducing my loan term by 3 years even after coughing up $20,000.
What are the other costs of car ownership?
Insurance. Insurance can be quite expensive, especially if you are young or inexperienced. I have seen annual premiums of up to $3,400 which averages about $300 per month!
Parking. You’ll need to park your car somewhere. Factor in all the parking costs, including weekend shopping. Typical HDB season parking costs $70-90.
Road tax. These are annual and vary with the engine capacity of your car. Check with your dealer. 1600cc cars hover around $600-700 per year; or about $50 per month.
Fuel. The average Singapore car travels about 20,000 kms per year. For most cars, this is about $300 in fuel monthly. Hybrids will be happy to do that distance for less fuel, of course.
Servicing. All cars need regular maintenance to keep them running well. A neglected car may cost you even more in repairs! A typical car in Singapore goes for servicing twice a year. Each servicing trip can cost $100-300, depending on where you go and what you do.
Fines. This needs no explanation!
What about 2nd hand cars?
2nd hand cars are certainly good financial decisions as they depreciate lesser than new cars. When cars go out of warranty after their 3rd (or 5th in some) years, their values drop quite significantly. Once they reach the magical age of 5 years where the ARF drops an additional 5%, a car’s value drops even further.
The problem with 2nd hand cars are generally mechanical risks. You’ll need to ask yourself if you can afford to have a car in the workshop for several days. Some people depend on their vehicles for a living!
You’ll also need to ask yourself if you have sufficient budget for repairs. I would generally say budget up to $2,000 for initial repairs (worst case) and thereafter up to $1,000 annually (again, worst case). If you cannot cough out this amount of money on top of your expensive insurance premiums and road tax, you should consider alternative means of transport.
2nd hand car buying tips:
- Insist that you send the car to STA for inspection of chassis alignment. STA has computerized chassis alignment tools that will be able to tell if your vehicle’s main structure has been compromised. Some small accidents cannot be detected (e.g. bumper dents, etc.) Make it clear to your dealer that a grading of C and below should be rejected immediately.
- Insist that you send the car to a third party workshop for inspection. Ask around for reputable mechanics who would inspect the car for a small fee. If the dealer disagrees to this, drop the deal. The car is likely a dodgy deal.
- Test drive the car – go over humps, switch off the A/C and radio, listen for noises, turn the steering left and right quickly, get on the gas and brakes randomly, test the lights, test the horns, insist on new tyres.
- Don’t judge a car by it’s paintjob. Most dealers send the car for a respray to cover up the dings and scratches left behind by the previous owner. Look for oil and coolant leaks under the car, especially after a test drive would be more ideal.
- Don’t trust the mileage. 9 in 10 car dealers meddle with the odometer. If you check your sales contract you’ll be surprised theres a paragraph that disclaims them from the accuracy of the odometer. Look for tell tale signs of wear and tear – seats, steering, gas/brake pedals, seat belts.
What are COE cars?
COE cars are basically cars without a PARF rebate. Before a car reaches 10 years of age, somebody decided to forgo the PARF rebate and renew the COE on the car so it has the right to drive for an additional 5 or 10 years.
I would advise against purchasing COE cars unless you are into vintage cars. They may look cheap, but in actual fact they depreciate much more because of their age (more than 10 years) and the lack of a guaranteed tax rebate.
If an average Singapore car travels 20,000km per year, a 10 year old COE car would have travelled 200,000kms! Be prepared for a major mechanical overhaul.
Always buy a newer car that you can afford.
With that, I end my super long blog entry. Happy motoring!