POSTED23 AUGUST, 2018
The Most Practical Used Car Buying Guide (Part I)
For many in Singapore, buying a car is a major milestone in life. After all, it is literally the most expensive city in the world to own a car. That makes shopping for a used car a sensible option for many Singaporeans. Make informed decisions, and life on wheels can be very rewarding and quite a breeze in more ways than one, if you like driving with your windows down. However, make a wrong move and it might just be the most expensive lesson you’d wish you never had to learn.
Read on if you are considering the purchase of a used car, especially if it is going to be your very first time purchasing one.See also: Best deals for used cars for sale in Singapore
Learn your acronyms and jargons.
In typical, unique-to-Singapore fashion, the world of cars offers a buffet spread of acronyms and jargons that will be quite a lot to stomach. Here are the critical ones you should have a good idea of as they directly affect the price of used cars.
Certificate of Entitlement (COE) – represents a right to vehicle ownership and use of the limited road space. New cars are registered with a 10-year COE, upon which the owner may opt to renew the COE for a period of 5 or 10 years, or scrap the vehicle altogether. If you deregister your vehicle before its COE expires, you can receive a rebate on the unused portion of the COE. The price of COE is called the Quota Premium (QP). Read more about COE and track its price trend here.
Open Market Value (OMV) – the Singapore Customs assesses the OMV of every vehicle imported into Singapore. It represents the total price paid or payable for the vehicle by the importer, including the purchase price, freight, insurance and all other charges incidental to the sale and delivery of the car into Singapore.
Additional Registration Fee (ARF) – basically a tax imposed upon registration of a vehicle. It is calculated as a percentage of the OMV, starting from a minimum rate of 100%. You can start to see why cars cost this much in Singapore. Also, it is called “Additional” because this is on top of the flat Registration Fee (RF) of S$220 payable for the registration of every vehicle.
Preferential Additional Registration Fee (PARF) – if you only took quick glances of the above so far, here is where you should pay full attention. PARF is the rebate amount you will receive when your vehicle is deregistered before 10 years old, and is calculated as a percentage of the ARF paid based on the age of the vehicle at the time of deregistration. A vehicle less than 10 years old is commonly referred to as a PARF car, while one older than that with a renewed COE is commonly termed a COE car. Bear in mind that you lose your PARF rebate eligibility if you choose to own and drive it beyond 10 years. The minimum PARF rebate is typically used to calculate the approximate annual depreciation of a vehicle, which we will cover shortly.
Absorbed all of that yet? Great. So how does any of it matter?
Put simply, a huge portion of what you pay for a car are accounted for by these components. And some of these major components are expended over time, 10 years in fact, typically. Here’s how.
Take, for a hypothetical example, a car with a COE Quota Premium (QP) paid of $50,000 during registration. Because the COE lasts 10 years, the value of the COE is exhausted by $5,000 every year, down to the day. So, if this car is exactly 5 years old, the portion of COE unused and eligible for rebate should the owner choose to deregister the vehicle, is half of the QP paid, i.e. S$25,000. Clearly then, when you are buying a used car, a part of the costs you are paying is for the remaining unused COE. Learn more about COE rebate here.
Another major component, the ARF, is also expended over time, albeit in a more complex manner. Vehicles that are deregistered on or before 10 years of age are eligible for PARF rebate, and this PARF rebate is calculated as a percentage of the ARF paid during registration. The ARF, in turn, is calculated based on the OMV. See how it all ties up now?
The PARF percentage rebate rate then depends on the age of the vehicle. Here’s an extract of the rate of rebate from the LTA Onemotoring website:
Once again, you can see that the ARF component makes up a big part of what you are paying for when buying a used car.
To even the least careful observant here, this immediately begs a question – why drive beyond 10 years and give up the 50% PARF rebate?
This is certainly true, especially if the ARF paid at the point of registration is very high. To some extent, this acts as an incentive for drivers to deregister decade-old vehicles, and keeps the fleet on Singapore roads relatively young, which does have positive effects on air quality.
In recent years, an observably higher level of prudence has also gained traction, as more and more car owners and buyers concern themselves with the depreciation of a vehicle. One with a shrewd calculator brain can already see at this point how important the 50% PARF rebate (also known as the minimum PARF rebate) plays out in this equation, which brings us neatly down to the next guide tip.
Fully understand the costs of owning a car.
Singapore tops many global surveys and charts as the most expensive city to live in, but very often this is almost entirely because part of the basket of goods measured includes the cost of owning a car, as reported by Time.com in this March 2017 report. Brace yourselves, as this next part of our guide might kill some dreams.
Now that you know what PARF and minimum PARF rebate is, we can easily calculate the first major cost component of owning a car in Singapore – its depreciation.
In the context of this used car buying guide, refers to the decrease in value of a car over its useful life. In other words, it is the cost to you for just the car itself for its remaining COE period left.
For the ease of introduction, let us consider a scenario where you purchase a PARF car and drive it until its COE expires. With that in mind, take the following illustration of a used Honda Civic 1.6L (A) as a hypothetical example:
Vehicle price = S$90,000
Minimum PARF rebate = S$20,000
COE remaining = 7 years
Cost of using the vehicle for 7 years = S$90,000 – S$20,000 = $70,000
Depreciation = S$70,000 / 7 years = S$10,000 per year
Simple enough, right? The depreciation of a vehicle is almost always the single largest cost component of owning a vehicle, as we shall see in the text that remains ahead. Bear in mind once again that the above illustrates an example of a PARF car. In the event that you decide to purchase a COE car, there will be no PARF rebate to offset against the upfront price of a car, so always consider the depreciation of a vehicle carefully.
This is the amount of interest you pay on the loan you take to purchase a car. In Singapore, car loan interest rates are charged and calculated using the simple interest method rather than the reducing balance method like most other loans.
Because the interest charges are conveniently wrapped into the monthly instalment figures, it becomes an easily and often overlooked component, which when unravelled may startle you. We have enjoyed several good years of a low interest rate environment, but ever so slowly the rates are creeping upwards, so give this some of your attention and avoid getting caught off guard.
In accordance with MAS directives, the maximum loan quantum you can borrow for a vehicle with an OMV of up to S$20,000 is 70%, or 60% if the OMV exceeds S$20,000. Using the same illustrated example above, let us consider how a loan application may pan out. Let’s assume you decide to take the maximum 70% loan for the vehicle, and by many strokes of luck managed to secure a loan at an interest of 2.5% per annum:
Loan amount = 70% * S$90,000 = S$63,000
Interest rate = 2.5% per annum
Interest payable per year = S$63,000 * 2.5% = S$1,575
Loan tenure = 7 years
Total interests payable = S$63,000 * 2.5% * 7 years = S$11,025
On a loan of S$63,000 stretched over 7 years, you are paying S$11,025 in interest. Bear in mind still, this is assuming a lower-than-market interest rate of 2.5%. At the time of writing, the interest rates are closer to 3%.
Simplified to a small degree, here is how the monthly instalment figure is then calculated:
Monthly payment = (S$63,000 + S$11,025) / 84 months = S$881.25
In real life, financial institutions will round the amount to a nearest dollar and the cumulated differences will be offset in your final instalment payment. The interest expense as mentioned earlier, is wrapped nicely into your monthly payments, and there is always the tendency for one to consider the instalment amount from a monthly budgeting perspective, thus ignoring the interest expense component. Taking an annualized cost of owning a car basis, do not discount the interest expense from your budgeting calculation.
So far, our illustrative Honda Civic is costing already S$10,000 in depreciation, and S$1,575 in interest expenses per year.
It is mandatory by law for every car on the road in Singapore to be insured. Driving a vehicle without a valid insurance coverage will get you into the very wrong side of the law. Do not drive without insurance.
As insurance policies of all sorts go, there are intricate complexities to different policy schemes and coverage, but for the purposes of this guide we shall park that aside for another day. For now, it is good enough to know that you require a comprehensive coverage if you have taken out a loan for the purchase of your vehicle.
Insurance premiums can vary widely for each driver and each car, and is dependent on a myriad of factors and statistical data that goes into the calculation of probabilities of a claim happening, known as actuarial science. You can get instantaneous quotes online these days, such as from NTUC Income or DirectAsia. When buying a used car, dealers usually require you to purchase your first year of insurance through them, as they make a small commission from it. Do your homework and get a couple of online quotes first to know you are not overpaying for your motor insurance.
Some factors that have significant effects on the premiums payable include driver’s details and driving history, make and model of the vehicle, and the age of the vehicle. In most cases, the driver’s particulars play a big part in determining the insurance premium. If you fall into a very young age band (e.g. 18 to 25 years), or have less than 2 years of driving experience, you can expect to pay higher premiums.
On the other hand, if you have been driving for more than a couple of years with a good history of safe driving and have not made not any claims, you fall into lower risk bands and enjoy lower premiums. In addition to that, you earn No Claims Discount (NCD) of 10% each year, up to a maximum of 50%. In fact, DirectAsia has recently introduced NCD60, and are giving safe drivers up to 60% discount on their premiums. That is a massive discount, considering insurance premiums usually costs thousands of dollars.
Using our illustration above once again, let’s look at the insurance costs assuming you are 30 years of age, have over 2 years of driving experience but are purchasing your first car and hence have 0% NCD. Here are two options from two different insurers you can find online:
Insurer 1: S$1,877
Insurer 2: S$1,811
These are the cheapest comprehensive coverage policies from each of the insurers that provide instant quotes online. As you can deduce by now, earning your NCD over time can generate huge savings. But for now, with the spirit of prudence, prepare yourselves mentally that motor insurance will cost a small fortune. Drive safely and over time, the pain will hurt less and less with NCD.
Yes, the taxman is omnipresent in your life. You get taxed for a loaf of bread, why not for using a car on the road too? Taxes, therefore, doesn’t end at paying the ARF. Every vehicle on the road pays road tax, and the amount is calculated based on the engine capacity of your vehicle. Back to our hypothetical example of a 1.6L Honda Civic, the road tax payable is approximately S$744 per year. Here is an extract of the calculation from LTA’s website:
Road tax is payable yearly or half-yearly, and increases exponentially as the engine capacity increases. Therefore, in comparison to our 1.6L Civic, a 3.2L car’s road tax will cost S$2,698. That is more than 3 times as much as a vehicle half its size in engine capacity. The calculations are also different for CNG or diesel cars, petrol-electric cars and electric cars.
Finally, the last thing to note for road tax is that it increases by 10% year-on-year for vehicles older than 10 years old, or in other words for COE cars, up to a maximum of 50% more. Read more about road tax calculation here.
Parking makes up for another significant chunk of expense not to be ignored before buying a car. About 8 in 10 of you wonderful readers live in HDB flats, so that is where we will start this chapter.
Unless you live in private estates, parking at home is already going to pinch you hard every month. Depending the type of HDB carpark available to you at your estates, monthly season parking costs between S$80 and S$110. Learn more about the types of carparks and rates here.
Think that is quite a lot to pay for parking? Wait till you drive to work.
If you are thinking of getting a car to drive to work, be sure to find out your parking options at work. Monthly season parking in the Central Business District can easily set you back S$400 to S$500 every month. Other industrial areas or business parks can cost half as much. Couple that with your season parking at home, and you are easily committed for another S$300 to S$600 a month just for parking. And that’s before you head out on weekends or at night to Orchard Road to catch that blockbuster.
So far, most of the costs that we have covered are inevitable the moment you choose to purchase a car. You need to bear the depreciation of your car, you need a valid insurance, and you need to pay road tax. In most cases, you at least have to pay for parking at home. What about costs that are variable?
Certainly, there are costs that are incurred only as you drive, and petrol is one of, if not the most significant of them all.
The average distance that a regular car in Singapore travels is approximately 20,000km a year, or 1,667km a month. On the basis that you choose to drive a relatively modern car that is efficient, you might average 15km/l. That works out to be about 111 litres of petrol a month. In very conservative terms, that works out to be approximately S$210 a month, although most drivers will probably tell you that no amount of light footed driving will get you 15km/l, and that they spend closer to S$400 a month on petrol.
Of course, there are exceptions to the case.
Modern hybrid iterations of a car such as these by Honda and Toyota combine the conventional internal combustion engine with a battery powered electric engine, and are more than capable of achieving fuel economy over and above 15km/l. Such cars, as seen earlier also enjoy lower tax rates or more tax rebates overall. However, there are downsides too, because life without lemons is bland. The batteries in hybrid powered cars typically needs to be replaced every 3 to 5 years, and can cost a fortune to do so without manufacturer’s warranty, so be sure to ask the right questions when considering such cars.
ERP and Other Parking Charges
Another variable expense that depends on individual usage culminates in the form of charging your CashCard. If you are lucky enough to be able to avoid Electronic Road Pricing (ERP) gantries on most days and your usual hangout spots have plenty of free parking available, you might be able to save hundreds of dollars each month. Otherwise, here is the reality check.
It is almost uncanny how often you might drive through an ERP gantry these days. For most drivers, it is all too easy to be paying S$2 every weekday, sometimes more (ask those who uses the CTE during rush hour). Taking that as average, you can expect to pay S$40 a month.
To sum up this section, we need to revisit the topic of parking, only this time we are concerned with parking other than that you pay for at home and at work. HDB’s hourly parking rate of S$1.20 inadvertently sets the floor for parking. In other words, that is about as cheap as parking can get. Most popular places charges between S$2 to S$3 per hour, and many others much more than that. Unless you are mostly a couch potato on the weekends, you will be clocking hours on parking a month. Coupled with the earlier mentioned ERP, make a conscious budget of at least S$100 a month for topping up your CashCard.
Having a car is akin to having an additional family member. This member needs the right kind of love and care, specifically in the form of regular maintenance. People who skimp on this may save a little money in the short term, but will almost certainly live to regret it later. We encourage drivers to be extra prudent, but here are some essential maintenance items that you definitely should not try to save a few dollars on.
Tyres – the importance of tyres cannot be stressed enough, yet is something often ignored by car owners. When you decide to drive on the roads, you owe every road user a responsibility to not only be a safe driver, but to ensure your vehicle is in safe working condition. One way to kill that is driving with tyres that are in poor condition. Modern tyres typically last between 40,000km to as high as 60,000km, while higher performance tyres will last much less. Most cars are due for a change of tyres every 18 to 24 months, and a decent set of 4 tyres will set you back anywhere between S$450 to $600. Keep them inflated at the right pressure to promote longevity and reduce uneven wear.
Brakes – equally important is ensuring your brakes are working well at all times. In fact, we would even recommend the everyday driver to upgrade your brake hoses to stainless steel braided type, that is how important your brakes are. Otherwise, ensure you replace your brake pads and rotors whenever they are worn out. The cost can vary widely depending on the car you own and wear rate depends on usage. Erring on the safe side, budget for about S$800 to S$1000 every 2 years for brake pads and rotors replacement.
Regular periodic maintenance – here is where car owners often regret saving a few dollars on, and where it will pay off if you go a little deeper into understanding what is often replaced during these maintenance intervals. Engine oil and oil filter is the most frequently replaced, and is critical to keeping your engine running smoothly and efficiently. Learn how this will save you fuel too in our 5 fuel saving tips article. Other items that are also typically replaced include air filter and cabin filter, albeit not necessarily as often. Learn how to check your engine oil and coolant levels, and keep handy a bit of each to top up whenever necessary. The battery in your car is another item that needs replacement every 2 years or so. Other wear and tear parts mostly can be replaced only when they are starting to show signs that a fault might happen soon. Do not ignore engine check lights, as they usually are a warning sign for something that is about to get pretty serious if you do not attend to it. All in all, budget for at least another S$1,000 for maintenance and wear and tear replacement each year.
Taking all of the above and annualizing it, be prepared to fork out anywhere between S$18,000 to S$20,000 per year in absolute total costs to own a car in Singapore.
We will just pause here for a moment and let that sink in.
Now that your tears have dried up, you may take comfort in knowing that this is of course with the assumption that you purchase a vehicle with an annual depreciation of S$10,000. One obvious way to significantly reduce the annual costs is by searching for a car with a much lower annual depreciation, possibly in the range of S$7,000 to S$8,000. Use our search filters on our used cars listing page to find your dream ride within your means.
Know your budget and be realistic.
Now that we have established it costs as much as $18,000 a year (or S$1,500 per month) to own a regular sedan in Singapore, it is time to try and fit that into your budget.
We are not about to become financial advisors, but if you trust the likes of Li Ka-Shing and Warren Buffet, then be sure that you are still able to save 15% to 20% of your monthly disposable income after paying for your car. If, however, you subscribe to the YOLO way of life, then by all means reach for your dream ride anyway!
Now that you are confident the budget is going to work for you every month, it is time to revisit another briefly mentioned topic – the loan rules in Singapore. This is critical, as you shall soon see.
We know from before that the maximum loan quantum you can borrow for a vehicle with an OMV of up to S$20,000 is 70%, or 60% if the OMV exceeds S$20,000. In other words, you have to fork out between 30% to 40% of the purchase price of a car as downpayment when applying for a loan. So if you are eyeing a S$70,000 car but are not ready to pay at least S$21,000 upfront, tough luck. Determine how much you are willing to pay upfront, and work it backwards to determine the maximum price of the car you are currently willing to afford to pay.
The need to pay large sums of money upfront is really where dreams are most often killed. The dealers are aware of this, and boy are they a creative bunch. To help buyers circumvent this problem, many dealers out there provide other forms of financing options, which in short are basically “inhouse” loans. Before you commit to these loans, be aware that they typically come with much higher interest rates. Other types of financing such as the balloon scheme reduces your loan quantum and monthly instalments, but in doing so forfeits your PARF rebate to the dealer at the end of the car’s 10 year COE.
So if you know the traps to avoid, and you are ready with your budget and upfront payment, what is next?
Check out car loans advertised online by the major banks and financial institutions to get a good idea of current market interest rates, and when you are finally signing on the dotted lines, ensure that you are not taking a loan at a rate that is significantly higher. In fact, ask your dealer if they are able to apply to several different banks or financial institutions at the same time before choosing the one that offers the lowest rates.
By now, you probably should have a good idea why you are thinking of getting a car. Making a list of the things you want out of this car you are going to be spending a fortune on will help you narrow down your options. Here are some questions you can ask yourself to better understand what is it you might want in a car:
Do you need a car for family needs? Does it have to have 7 seats and at least a certain number of airbags? How well should it score in crash tests?
Are you after performance? Are there sufficient aftermarket parts that are readily available?
Are you after a lifestyle automobile where you can drive with the wind in your hair?
Do you need a car for work? Should it then be fuel-efficient?
Do you have a preference for a particular brand of cars?
Are you looking for a short-term ride, or a longer-term workhorse?
Answering these questions should help you narrow down your choices fairly well, or at least decide on a body type, such as a sedan, MPV or SUV.
Setting expectations also mean that you should understand if you are considering a used car, don’t expect it to be in showroom condition, especially if the car is over 6 or 7 years old. There will inevitably be visible wear and tear, and you might be able to use these as arguments to push the prices lower.
Once you have a clear idea what you are after, there is only one thing left to do…
And that is to read part II of our guide – coming soon!