What is interest-only financing?



Mini has introduced Mini Easy Finance in Singapore, an interest-only financing scheme that lets you own a new Mini for just $128 a month. But how does it work, and what should you take note of?


SINGAPORE

It’s a pretty eye-catching figure: own a brand new car for just $128 a month in Singapore. But that’s what Mini is purported to be offering with their Mini Easy Finance scheme.

How it works though is that you’re only paying the loan interest of the car for the first two years. Mini says that the scheme is tailored to this current environment of financial uncertainty, and lets buyers have better liquidity for the short term while still getting to own a brand new car.

You can drive this home for just $128 a month


There are, of course, terms and conditions to follow. For one, you can only finance up to 60% of the car’s price over 7 years (the maximum term allowed by the Monetary Authority of Singapore). which means you still have to pay a 40% downpayment.

The $128 figure is calculated using a 2.28% interest rate based on the selling price of the Mini One 5 Door, which currently retails for $111,888 inclusive of COE. Hence your cash downpayment for the car works out to $44,755, which is still a not-insignificant sum.



The interest-only repayment is valid for up to the first two years of the loan repayment period. After that, the monthly payment rises to $1,247 a month. Comparatively, on a straight-line finance scheme, your monthly loan repayments works out to $927 a month.

Mini however states that the Easy Finance scheme is flexible, and that you can choose to do the interest-only payment for a shorter tenure (say, one year). Doing that means that your loan repayments later on will be reduced accordingly as well.

“The obvious advantage of the interest-only scheme is that you have lower monthly repayments during the first two years, freeing up your liquidity and cash flow during these uncertain times.”

And of course, the rate also varies depending on the model your choose, as well as price fluctuations based on the prevailing COE premiums. We’ve worked out a table below for illustration:

Mini One 5 DoorEasy Finance
(interest-only)
Straight-line finance
Selling price (with COE)$111,888$111,888
Downpayment (40%)$44,755$44,755
Monthly payment (First 2 years)$128$927
Total instalments paid after 2 years$128 x 24 = $3,072$927 x 24 = $22,248
Monthly payment (Remaining 5 years)$1,247$927
Total instalments paid for remaining 5 years$1,247 x 60 = $74,820$927 x 60 = $55,620
Total cost overall$44,755 + $3,072 + $74,820 = $122,647$44,755 + $22,248 + $55,620 = $122,623

(Interest calculated based on 2.28% interest rate)

The obvious advantage of the interest-only scheme is that you have lower monthly repayments during the first two years, freeing up your liquidity and cash flow during these uncertain times.

However, because you’re only paying off interest during the first two years, you’re not paying off any of the principal until the third year, which means your monthly payments will see a significant increase after that period. So it’s really a case of ‘pay less now, pay more later’.

There’s also the issue of when you want to move the car on after three years. While the resale value of the car itself is unlikely to be much different, you will have a larger outstanding amount to repay on Easy Finance as compared to a regular car loan. As such, you’ll have less cash in your pocket once you’ve sold the car on.

That said, if the sums work out for you, the Easy Finance scheme could be the solution for buyers who may currently have temporary cash flow issues, but are confident that things will pick up for them in a couple of years.

about the author

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Ben Chia
CarBuyer's senior staff writer went out to explore the Great Big World, including a stint working in China (despite his limited Mandarin). Now he's back, ready to foist upon you his takes on everything good and wonderful about the automotive world.