Refinancing Car Loan to Improve Your Total Debt Servicing Ratio

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Refinancing an existing car loan can save you money in the long run. Not only will you improve your Total Debt Servicing Ratio (TDSR), it might even help you lessen your existing financial burdens.

Planning to refinance your car loan, but unsure of how it works? It basically involves you taking up a new loan to pay off your existing car loan.

Most car owners choose to refinance their car loans because their credit rating has either improved due to an increase in salary or there has been a transition from a commission-based income to a fixed income.

Regardless of their reasons, the main purpose of refinancing a car loan is to decrease the monthly loan payment (by finding a more favourable interest rate or finding another loan with a longer repayment period), which in turn lessens their Total Debt Servicing Ratio (TDSR).

What is Total Debt Servicing Ratio (TDSR)

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Total debt servicing ratio (TDSR) is the percentage of a borrower’s gross monthly income that goes towards their monthly loan repayment. It affects their eligible loan quantum for personal, housing and car loans.

The TDSR framework was introduced by the Monetary Authority of Singapore (MAS) in 2013 to ensure Singaporeans borrow responsibly and aren’t overburdened by debt.

The regulators limit up to 60% of your monthly income. So, if you are earning $6,000 per month, the total loan repayment amount is capped at $3,600.

For example, if your total monthly repayments consist of a property loan ($1,000), personal loan ($1,000) and credit card repayments ($1,000), that means your monthly repayments for your car loan cannot exceed $600.

On the other hand, financial institutions will take a further 30% cut on the TDSR if you are self-employed or receive a commission-based monthly income.

In this case, you will be entitled to borrow $2,520 per month, and that's where it may affect your car loan [($6,000 x 60%) x 70%] = $2,520.

Why should I improve my TDSR?

As previously stated, TDSR affects your eligibility for any loans you wish to take up. If you have an existing car loan that takes up a huge portion of your TDSR, that means any future loans you wish to take up will be lessened.

How does refinancing work?

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Let’s say you signed up for an in-house car loan amounting to $60,000 with an interest rate of 4% for 7 years.

Loan Amount: $60,000
Number of Monthly Installments: 84 (7 years x 12 months)
Total Amount Payable + Interest: $60,000 + $16,860 = $76,860
Monthly Loan Installment: $76,860 / 84 months = $915

Suppose you have paid 2 years of installments, when you decide to refinance your car with a new loan at 2.28% from a bank.

Loan Balance: $76,860 - $21,960 (24 months x $915) = $54,900
Number of Monthly Installments: 84 (7 years x 12 months)
Total Amount Payable + Interest: $54,900 + $8,772 = $63,672
Monthly Loan Installment: $63,672 / 84 months = $758

Difference: $915 - $758 = $157 per month

As you can see, this saves you approximately $157 a month, or $1,884 a year.

Refinancing your car with this new loan also lowers your TDSR, allowing you to take up a larger quantum for other types of loans (renovation, personal, housing, credit cards, etc.).

However, one downside of refinancing your car loan is that it will incur an additional transfer count.

Summary

In conclusion, refinancing your car loan can be a viable choice if you find an interest rate that is attractive to you, or if you find one with a longer repayment period.

It is also imperative to pay attention to the TDSR framework as it helps you manage your debt obligations and allows you to make smarter choices when applying for loans.

If you have doubts on your loan capabilities, do approach us for an obligation-free consultation. Not only will we advise you on the best possible loan option to finance your car, we will also settle the necessary paperwork upon the transfer of ownership.

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