Should you renew your car's COE - Part 1 - MAS loan restriction and Considerations for COE renewal

Without a doubt, this question would be on most Singaporean car owner's mind as their COE comes to an end. For me, my family's reliable 7-seater will reach its 10 year mark in less than 1.5 years. As the prices of new cars become increasingly out of reach of the masses, more people are starting to consider renewing their COE.


New Monetary Authority of Singapore ruling on car loans
Ok, to qualify myself, cars in Singapore have always been expensive relative to the earning power of average folk. The reason why it has become even more difficult to own a car is because of the the new financing limits on car loans. It used to be possible to walk, no sorry, drive away from a dealership with very little down payment. The problem was, people were spending beyond their means, thinking that it was so easy to own a car with little income. While the monthly repayment seemed palatable on first look, compound interest can really creep the total expenditure high up.

To force financial prudence onto car lovers in Singapore,
1) A loan limit of 50-60% was imposed.
2) The loan must be repaid within 5 years.

These two simple lines meant that for a new bread-and-butter Toyota Vios costing $110,000 would require
1) A hefty down payment of $44,000
2) Monthly repayment of $1,258 (assuming a typical 2.88% interest rate).

If a new replacement car is out of your reach, there are two widely discussed options that have been making its rounds on forums.


Options to choose!
The first is to go for a COE renewal while the second is to scrap the car and replace it with a 2nd hand car. Both options have their own pros and cons and may vary in economic feasibility depending on what what your current car is and the crop of 2nd hand cars on sale.

For part 1 of the article, let's discuss the COE renewal.

Choosing to renew 5 years or the full 10 years.
You do not need to bid for a COE price when renewing your COE.

1) The 10-year renewal:
The renewal price is based on the Prevailing Quota Premium (PQP) which is an average of the last 6 bidding results (3 months). At the time of writing, the PQP is $64,584. This is a whopping amount of money to cough up and understand that this amount can only be secured through personal loans which have higher interest rates compared to car loans mentioned earlier (will update with more details on personal loans). If you have that kind of cash lying around, you may just want to get the 10-year renewal since you can always scrap the car and get back the remaining value left in your COE. The amount you get back is pro-rated to the remaining life in the COE from the price you paid for the PQP. In investment terms, COE system is a put option!

2) The 5-year extension
If you do not want to take a loan or pay the full PQP price, you may want to consider going for the 5 year extension, which works out to be $32,292. After all, your car may not be worth keeping for too long anyway. But wait! Renewing the COE for 5 years has a restriction that prevents the owner from re-extending the car beyond that while the full 10 year renewal doesn't have the same restriction.

Sounds simple?

Here are some good news and some bad news

The good news is that renewing/extending your car's COE is going to be about half the price you will spend compared to buying a new one altogether. This is great considering that you may have other loans to finance such as your housing loan. With the Total Debt Servicing Ratio (TDSR) in effect, you may have to watch your loans.

The bad thing is, your road tax will increase 10% yearly and capped at 50% by your car's 15th year. Also, a friend of mine mentioned that insurance companies will also take a chance to jack up your insurance premiums. But wait, that's not all. You also lose your Preferential Additional Registration Fee (PARF) which consist of 50% of the Additional Registration Fee you paid earlier when you first bought the car. Depending on what car it is, the amount can be substantial. Using the example of the Toyota Vios again, the PARF would be $7,000. If you love your car and you are sure that it will go the distance with you, then these costs may just be worth it.

The next part would be on the costs and risks involved in scraping your car and buying a used car. Check back soon!