Introduction

Many articles have been written on the ‘true’ cost of owning a car in Singapore (Here, here, and here). And these articles have done well in laying out roughly how much one should expect to pay for a car. But one aspect that these articles have not covered is the opportunity costs of owning a car.

As financially responsible people, we all know that we should (a) Save and (b) Invest the savings. So when we buy a car, this ability to save and invest seemingly goes down the drain… or does it? In this article, I want to show you (with the help of this nifty tool) that this does not always have to be the case. In fact, there are optimal downpayments and loan terms that one can take when buying a new car to these investment opportunity costs as much as possible!

Assumptions

The tool (as with all estimators) makes a few assumptions, namely:

1. The return on investment (ROI) of your investments remain relatively constant over 10 years (a big assumption, I know but we can always estimate a lower ROI to account for bad years)
2. Your monthly investments/car payment budget doesn’t change over the 10 years

While these assumptions may seem a little far out, I would argue that these are good assumptions because they assume ‘worst-case’ scenarios. This means that whatever the tool estimates will be the safest optimal estimates.

Case Study #1: Cheapest Car, Average Budget

One of the cheapest cars currently is the Perodua Bezza which comes in at $64,999. Let’s assume your salary is ~$3000 and this allows you to have a monthly budget of ~$700. This $700 is what you intend to save and invest but will also use to pay for your car. So, inputs as follows:

• Price of Car: $64,999
• Monthly Expenses: $500 (Fuel, parking, servicing etc.)
• Bank Loan Interest Rate: 3%
• Return on Investments (Annual): 7% (annualized return of S&P500 is 9%)
• Monthly Budget: $700

p.s. you can play with an interactive version of this here

Some takeaways from this:

• The best way to maximize your ROI is to pay for the car fully and take the shortest loan term. This makes sense because you would be able to start committing more of your $700 every month into investing.
• If you don’t want to ‘lose’ money, you would have to pay at least 42k* *in downpayment. This is assuming you decide to take a 7 year loan term.
• Anything below the $0 line meant you overspent* *your monthly budget of $700. This results in you not having any money to invest for the entire duration of your loan term, eating away at your ability to save and invest

Case Study #2: Cheapest Car, Above-Average Budget

Here, we return to our beloved Perodua Bezza but we get a glimpse of the power of compounding if we are able to start investing early. We assume that your salary is slightly higher at ~$5500 and so your monthly budget is $1200.

p.s. you can play with an interactive version of this here

More takeaways:

• With a higher budget, you can consider taking a longer loan term. Notice how the 7 yr loan term crosses over the 6, 5, and 4 yr loan terms. That’s because with a higher budget, it makes sense to maybe pay less each month (i.e. take a longer loan term) and have more leftover to invest.
• A budget of $1200 more than covers the monthly costs. Note how none of the payoffs are negative.

Case Study #3: Average Car, Average Budget

Maybe the Perodua Bezza really doesn’t cut it for you. You decide to go for the most popular car in Singapore — a Toyota Corolla Altis at ~$94,000. Your salary is slightly higher at ~$4000 but you’re paying off a new flat, so your budget remains the same at only ~$700. Same inputs as above, the only change is the car price.

More takeaways:

• Compared to the cheaper car, your downpayment would have to be a lot higher. A monthly budget of $700 just doesn’t seem to cut it for this price range. Want to not lose out on investment returns? Be prepared to pay at least 62k in downpayment for a 4 year loan term

Conclusion

Buying a car in Singapore is expensive and it makes sense to optimize your downpayments and loan terms. From the case studies above, we see that there are, in fact, downpayment+loan term combinations that allow you to continue to invest and hence decrease the opportunity costs.

What is the optimal for you? Well, you can find out using the tool here. Thanks for reading!