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Is It Financially Irresponsible To Lease Or Rent A Car If You Cannot Afford To Buy One?

The lack of a downpayment should not be the only reason why leasing a car should be considered.

Cars – one of the traditional 5Cs of the Singaporean dream, arguably remain a lofty ambition for many young Singaporeans as a symbol of achievement. The biggest hurdle for aspiring car owners comes from the hefty price of a Certificate of Entitlement (COE), which gives one the right to own and use a car in Singapore.

Recently, COE prices for category A – cars with engine capacity up to 1,600cc and category B – cars with engine capacity above 1,600cc surged to a high of $106,000 and $150,000, respectively, in October 2023.

For those unable to bear the weight of ownership costs, leasing or opting for private-hire driving has emerged as an alternative. Amidst escalating COE prices and soaring interest costs, these alternatives offer aspiring car owners the use of a car, albeit at a higher monthly installment that they otherwise may not have been able to afford. As such, more aspiring car owners who find the traditional route of car ownership to be onerous are turning to leasing to finance their car purchases—but should they?

Cost To Purchase A Car As A Private Car Owner

When we purchase a car as a private vehicle owner, we may seek financing due to the high cost of ownership, which includes the Open Market Value (OMV) – the actual price of the vehicle imported into Singapore, the Additional Registration Fee (ARF) – the tax imposed to register the vehicle, and the COE.

Typically, the financing is restricted to 60% or 70%, depending on the OMV of the vehicle, with a maximum loan tenure of up to 7 years. These limits were introduced by the Monetary Authority of Singapore (MAS) on borrowers purchasing new or used motor vehicles, including hire purchases, from 27 May 2016 as a way to encourage financial prudence among vehicle owners.

OMV of motor vehicle Maximum LTV Maximum loan tenure
Less than or equal to $20,000 70% 7 years
More than $20,000 60% 7 years

Source: MAS

Along with the registration fee of $350, vehicle owners also have to pay for the ARF, which is also dependent on the OMV of the vehicle when registering a new vehicle. The latest ARF rates for cars registered after 15 February 2023, are as follows:

Tax Structure For Registering A Car
Vehicle Open Market Value (OMV) ARF Rate (% of OMV to pay)
First $20,000 100%
Next $20,000
(i.e., $20,001 to $40,000)
Next $20,000
(i.e., $40,001 to $60,000)
Next $20,000
(i.e., $60,001 to $80,000)
Above $80,000
(i.e., $80,001 and above)

Source: LTA – One Motoring

For illustration, assuming we purchase a Toyota Sienta Hybrid based on the 2nd COE Bidding results conduced in December 2023, the average purchase of the car would amount to $143,845*.

The cost breakdown for a Toyota Sienta Hybrid is as follows:

  • OMV – $27,706
  • Registration Fee – $350
  • ARF – $30,789
  • COE – $85,000

*Price excludes GST, excise duty, and the Vehicle Emission Scheme (VES) rebate.

Based on the purchase price of $143,845, we need to place a downpayment of at least 40%, or $57,538. Assuming we choose to borrow the remaining amount of up to 60%, or $86,307 over 7 years at an interest rate of 2.78% per annum, it would translate to a monthly installment of $1,228. While a young professional just entering the workforce may find it possible to finance the monthly installment, the large downpayment requirement could pose a significant financial challenge.

That’s where some may turn to leasing or renting a car as an alternative option.

Read Also: Can Leasing A Brand New Car In Singapore Be Cheaper Than Buying One?

Cost To Lease Or Rent A Car

One of the main benefits of leasing a car is that we don’t have to put up a large down payment, and we are not constrained by any loan restrictions like the Total Debt Servicing Ratio (TDSR) as opposed to buying one.

Furthermore, the fixed monthly leasing fee would cover most of the car’s running costs, from maintenance to insurance and road tax, with the exception of petrol and parking fees. We get to have the full use of the car, including driving overseas—i.e., Malaysia—over a stipulated lease period of between 5 days and 1 year.

Assuming we rent a Toyota Sienta Hybrid from a car rental company, it would cost between $73 and $85 per day, depending on the length of our lease commitment. Typically, the longer the contract, the lower the daily rental rate. Assuming we rent for a year, it would translate to a monthly lease fee of $2,190.

Another type of leasing that is gaining popularity is renting a vehicle as a private-hire driver. The private hire companies may offer selected brand-new car models at a small upfront deposit and may charge a daily rate based on the length of the lease committed, which may range between five and six years.

For example, GrabRentals is offering a Toyota Sienta Hybrid at the following cost:

  • Non-refundable deposit: $5,450 + $163.50 admin costs
  • Effective daily rate of $126.44/day for a 5-year lease or $111.18/day for a 6-year lease

Assuming we take a 6-year lease, our monthly rental cost would amount to $3,335.40.

Read Also: Guide To Car Sharing Options In Singapore: Blue SG, Tribecar, Car Club, CarLite, Shariot, GetGo, Drive lah

Implications Of Buying Or Leasing A Car

It’s undeniable that the cost of car ownership in Singapore could be a stretch for most aspiring vehicle owners. As highlighted above, the monthly installment increases depending on the option that we choose. Buying a Sienta would require a downpayment of $57,538 and a monthly installment of $1,228. On the other hand, if we chose to lease the Sienta, it would cost us $2,190 per month, while renting as a PHV driver would cost us an initial non-refundable deposit of $5,613.50 and a monthly installment of $3,335.40.

Despite the higher monthly installments and no residual value, leasing could be a pragmatic choice if we are financially capable of buying the car as a private car owner. Leasing gives us the flexibility to choose the length of the commitment period that meet our short-term needs, especially if we do not intend to use the car for the full length of the 10-year COE period. For example, young parents who may wish to only have the use of a car for the first two-to-three years from the birth of their newborn, may find leasing more appealing than buying a new car.

Read Also: Cheapest Cars That You Can Buy In Singapore

Possibility Of Overextending Ourselves

However, if we perceive leasing or renting as a get-around to owning a car at a lower financial commitment due to the smaller initial capital outlay required, it could lead to overborrowing beyond our means. In other words, leasing in such a situation could be akin to purchasing goods and services on a high credit line, knowing we are unable to make full payment on the purchase.

One instance where we may practice such behaviour is buying furniture on flexible financing terms, where the payments are broken down into smaller and more affordable monthly payments. By stretching the payment period to reduce our monthly commitment, we may end up buying beyond our means or budget. Should there be any unforeseen financial circumstances, it could lead to us missing on our payments, which would incur a late penalty fee on top of the financing charges.

Similarly, the ability to “drive off” for little to no deposit down when leasing a car gives us a false sense of affordability that may lead us to overextend our credit terms. Unforeseen circumstances, such as loss of job or not being able to make private hire rides, may affect our lease financing while we are trapped based on the contract period that we signed on. As such, leasing a car when we are unable to purchase it may place us in a financially vulnerable position.

Having To Work More To Finance Lease Payments

One reason why we may consider leasing a car despite not being able to afford it is the convenience that we can get in terms of transporting our family members, especially if we have young ones or seniors in the family. Having a car not only allows us to make emergency runs to the hospital more quickly but also makes it more convenient to travel on family outings.

However, contrary to our expectations, we may instead end up driving more as a private-hire driver to make up for the high daily rental cost of the car. This may inadvertently deprive us of the family bonding time that we may have hoped for as we work longer hours to finance and stay on top of our lease payments.

Work Your Financial Sums Before Deciding To Get A Car

As with all financial decisions, it’s important to weigh the pros and cons of the different options. If we decide to lease a car, we should work out our financial sums by taking into consideration the totality of our loan obligations, similar to how we would factor in the TDSR of 60% when buying a car. This helps us to be more financially prudent and err on the side of caution.

Additionally, we should also ensure that the monthly installments when leasing a car are within our means and not overcommit a large portion of our income to transport costs. These steps help us to understand the true affordability of leasing a car, which might otherwise get masked by the lack of downpayment and the allure of working as a PHV driver to pay off the monthly installments.

Read Also: Cost Of Owning A Car In Singapore Over 10 Years

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