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Cooling measures for cars spurned.

Tuesday, March 5, 2013

Today, a report by Channel NewsAsia revealed that people are falling into debt because of the high cost of car ownership in Singapore. So, the measures by the MAS limiting car loans to 60% of the purchase price and imposing a maximum duration of 5 years in repayment period are good to have.

In fact, MAS should do more to educate the general public and to encourage financial prudence.


However, in the same report, it was revealed that "some credit companies that do not fall under MAS regulations are continuing to offer car loans of up to 90 per cent of the purchase price, although at interest rates of up to 3.88 per cent, up from an average of about 1.88 per cent before the new rules kicked in last week."

How is it that some companies do not fall under MAS regulations? Shouldn't the authorities plug the loophole? Good measures are only good if they can be 100% enforced.

With interest rate more than doubled from 1.88% to 3.88%, the cost of borrowing has become much weightier. I hope car buyers thinking of exploiting this loophole think and think again.

Take for example a 1.6 litre Japanese make with a price tag of $120,000. A 90% loan would mean a principal sum of $108,000. This is definitely not loose change.

A 1.88% interest rate over a 10 year period would mean paying $20,304 in interest. With interest rate at 3.88%, the same car loan would carry an interest payment of $41,904!

The interest payment over a 10 year period is equal to the annual earned income of some junior executives! Of course, we have yet to consider the running costs of a car.

Also, consider this. At the end of the 10 year period, the 1.6 litre Japanese car probably has a residual value of less than $10,000 (assuming an OMV of less than $20,000). This means that the car would have depreciated by more than 90%.

Total loss over 10 years: $151,904.

This is almost enough to pay for a brand new BTO 3 room flat in some parts of Singapore.

Related post:
Cooling measures for cars.

25 comments:

Singapore Man of Leisure said...

AK,

My gentle poke to you is that if not conscious, you may sound like what mainland Chinese friends would say: "Stand talking no back pain."

Not everyone can afford 50% or more deposit for a car ;)

I would caution against encouraging big daddy to run our lives.

What if big daddy says tomorrow they will take away the SRS and CPF investment scheme since there are those amongst us who lost money big time with DIY investing?

Let's go back to CPF 3.5% you silly peasants - sure no loss one! (Of cus don't mention CPI 4%. Shhh...)

We won't know the pain until the pin pricks our skin.

Sooner or later, one "daddy knows best" policy will surely prick us.

SMOL - cheers to small govt and free market!

AK71 said...

Hi SMOL,

I feel that if people cannot afford a 50% downpayment for a car, they should not buy one. Borrowing to fund personal consumption is not prudent.

Unfortunately, since not everyone is prudent, have measures to encourage financial prudence is not a bad idea.

As for the example where the government stops people from investing the money in their CPF accounts, I think it has already happened. The first $60k cannot be used for investing which is not a bad thing. If someone is not financially savvy, at least he would not lose all his CPF money. ;)

SnOOpy168 said...

It has always been easier to buy a car/motorcycle than a house.

Imagine that I wasn't slapped with the >35years & above ruling for singles scheme. Perhaps I would have gotten my keys when I am 25-27 years old, when a 3 room HDB isn't really that scary a price.

but our government is always at the other side of the fence. Yet those favoured chosen people, didn't want to make or fail to make sufficient babies.

AK71 said...

Hi SnOOpy168,

Well, to be fair, couples need their own homes more than us singles. ;)

Singapore Man of Leisure said...

AK,

Price is a good allocator of scare resources.

I didn't know level of financial literacy is also needed ;)

What next? Must take a MAS required test (like if we qualify to buy overseas stocks, CFDs, forex, etc) if we want to buy anything that involves a loan?

Ban credit cards to those who can't pay in full after 30 days?

Or maybe it's better you don't take this or that subject since we don't think you have the aptitude for it? (Who gets to decide anyway?)

The peasant boy/girl has dreams and aspirations like everyone else; they are not the exclusive domain belonging only to those who can "afford it".

OK! Enough fun bantering for the day! Must go buy Toto. No wonder Singaporeans so hardup for money. Got money can talk louder.

SMOL - church mouse

veronika said...

Somehow, buying a car may not be "personal consumption" .The lines can be blurred.

An insurance agent or realtor may argue that the car is part & parcel of his business. It also doubles as a family car. Same goes for all the "professionals" such as one MP wanna be recently.

The depreciation costs is real in any scenario: personal or business.
There are occupations that need a car and employers do ask if you have one. Though I doubt they will finance it.

tsusmagne said...

haha AK,

I was one of those whom this new policy is trying to target, although 2 years late.

Bought a car 2 years back, just a year out of college, zero down and a 10 year loan. My thinking was: you live only once and salary increases will make it affordable in time to come.

Well, the car's a dreadful strain and as I was single then, i actually had no real need for it. But I dont regret the purchase then as I bought it just before the COE quota reduction and my car price has since skyrocketed. Think if i sell it now, Ill actually break even.

But salary increases along the way have definitely made the monthly repayment a lot more comfortable. But I always think how much I am forgoing in terms of investment capital!! Oh well.

So I do welcome the new MAS restrictions on the 50% downpayment. It prevents ppl like me who frivolously buying cars with no real need for them, haha.

But I disagree that MAS should curb loans by private money lenders who fall outside their restrictions currently. I feel it is suffice to curb the usual channels by which ppl obtain car loans. But we must leave some choice to people who die die want to get a car loan and are willing to pay a higher interest for it. Let's say if you decide you cannot live without a car and you are willing to forgo everything else and eat grass to fund it. I think I should respect your choice of wanting to eat grass to afford a car.

I think this is different from investing using CPF money. This is because CPF money is supposedly the nest egg - the govt is right to build up a buffer before letting you mess with your nest egg. This because the consequences are severe if you lose your whole nest egg - the state has to support you in olg age.

Well as for buying a car, you cant make the payments? Just repossess your car, no biggie, no opp cost to the state.

so agree with SMOL - small govt is best!! :)

Cheers,
t

AK71 said...

Hi SMOL,

I am not begrudging anyone his or her aspirations. Aspirations are good to have and we all work towards our own.

However, taking short cuts to fulfilling those aspirations could be and often is detrimental.

It is just like the story of how a farmer tried to make his padi grow faster and gave them all a slight yank. They soon died.

All of us need someone to knock some common sense into our heads once in a while. Myself included. :)

AK71 said...

Hi veronika,

If a car is required for work, then, I look at it as a cost of doing business. The car becomes a productive asset.

If the car then doubles up as a family car, wonderful! :)

EY said...

Hi AK,

I understand where SMOL is coming from. Yes, empathy, we ought to have. Micro management? Say no, please.

But I would like to add to your perspective. The point isn't about 50% or 90%. It is about absolute numbers. With prices of mass market cars doubling from 5 years ago, a 50% loan now is equivalent to 100% then, in terms of loan quantum. Considering that income hasn't risen as much, then regulation is indeed necessary to stop people from spending too much money which they don't have. It is easy to give in to one's materialistic impulses based on affordability - low interest, low monthly repayment. But this is sweet poison. Who foots the bill when debt spirals out of control?

My take is, regulation has come in too late. Better late than never, though. Free market? Yes, but not when the stakes are high. :)

Endrene

AK71 said...

Hi tsusmagne,

Let's say if you decide you cannot live without a car and you are willing to forgo everything else and eat grass to fund it. I think I should respect your choice of wanting to eat grass to afford a car.

I laughed so hard when I read this. ;)

OK, you and SMOL are both for a 100% free market system. I am obviously outnumbered here. haha... ;p

However, I am puzzled. You cannot agree with SMOL if you think that government intervention to protect our CPF money is justifiable, can you? Hmmm...

AK71 said...

Hi Endrene,

Yeah! :D

Could you sense the desperation in my cheer here? Hahaha... ;p

It is easy to give in to one's materialistic impulses based on affordability - low interest, low monthly repayment. But this is sweet poison.

Sweet poison indeed...

Affordability is such a debatable concept, isn't it?

"Oh, we can surely afford this. We just have to use someone else's money to pay for it!"

If we are concerned with building our wealth, borrowing large sums of money to fund the purchase of items for personal consumption is the opposite of what we should be doing. I don't think anyone can disagree with this.

The debate here is probably whether we should force everyone to become concerned with personal wealth building. ;)

Ana said...

SMOL,
Unfortunately, if there was no curb, & interest rates increase or these guys lose their jobs, the same guys will blame govt for it as well.
Like it or not, singaporeans are generally immature - - and they sound like they don't want 'nanny state' but their behavior betrays the fact that they need to be nannied. Meanwhile, the govt does not want to be anybody's nanny - but alas.....

Poh Soon said...

Sorry, side tracked a bit here. Was wondering, whether any of you having problem retrieving and viewing the SGX announcment especially those that announce the shareholding changes such as the
this?

SnOOpy168 said...

I have known of people who could afford those fanciful performance car and ching (modify) them like Initial D type of looks. But then hor, almost 100% go to JB for cheap petrol. These group heng heng never get caught over the 3/4 tank thingy.

Eat grass ? Hmmmm

Seriously. this action by MAS is to prevent a meltdown later. What happens when another GFC arrives and that people lost their jobs/income ? The repayment is still in force and they have to suffer the consequences & get bail outs from their family / parents ?

As for the housing part. Well, we all needs to be housed. Either with parents or one our own. If the couple needs more space, then it should be available to them, just as us singles needing ours. Just that the couple buys the biggest and claimed the max "subsidy" , then not make babies. So thats no diff than us single who aren't making any babies anyway. Why then they should have better standing leh ?

AK71 said...

Hi SnOOpy168,

Aiyoh, you don't have to go to JB to see people with nice cars trying to save money buying cheap petrol. I see MB, BMW, Audi, Porsche parking illegally at the side of roads waiting to pick up their other halves in the evenings all the time.

I always tell my friends that these people have money to buy super expensive cars but don't have the money to park in the car parks! Of course, they are being extremely inconsiderate as well. Those double yellow lines and zig zag lines are invisible to them.

Grrrrr....

I am sure that the measures by MAS on car loans are good to have. I remember during the GFC, there were many expensive continental cars in the pre-owned market going cheap. Many Ferraris too. It was also in the news.

Relatively young high flyers had hard landings when they lost their jobs and had to sell all the stuff they bought on credit!

Regarding HDB flats, I can see that it is a sore point for you. ;)

OK, I know where you are coming from but it is just like how people who retire to Malaysia should take the good with the bad, by the same token, those of us who choose to stay on in Singapore will also have to take the good with the bad. Fair, right? ;p

Of course, KBW is going to allow singles to buy BTO flats soon. The singles now are luckier than us. Just our luck. ;)

Singapore Man of Leisure said...

Fans of AK,

I got ask permission from AK some weeks back whether I can poke him hor!

So don't get the wrong idea ;)

Some are ants; I am a cricket.

Once upon a time, I can't understand why my ex needs to buy so many shoes and handbags (especially when I am paying for some of them)? What a waste of money!?

"Buying them makes me happy." she smiled.

Took me quite some time before I "get it".

I've now gone over to the "it makes me happy side" - yes, I am the cricket; not the ant ;)


To Ana,

I hope you will not meet a guy who will tell you what to buy and what to wear. Run if he says "It's for your own good!"



AK71 said...

Hi SMOL,

Poke away! I appreciate it. :)

After all, I don't know everything and I am probably wrong in many things.

I owe my personal development to pokes, slaps, pinches and punches from many people in my life. This is the honest and painful truth. ;p

Singapore Man of Leisure said...

Poh Soon,

You very de funny!

That's a very good trick I'll borrow with pride. Thumbs up.

Next time I am in a lively discussion with friends, I say with a deadpan face, "Eh, what day is today?"

Let's see what reaction I'll get!

LOL!

SnOOpy168 said...

Looks like SMOL has just gotten rid of a sponge and a princess.

Congrats

mark said...

What about people who are given travel allowances, say 1500 a month. Amount aside, we're going to have a lot of yelling from different groups.

What could have been done is to punish the banks. This I believe is the primary intention, but banks have ways to get back the lost revenue through other means.

Banks have been dangling very attractive rates and discounts for 10 year loans. Say if I took a loan for 100k, and was given 20k in discounts in total (this was the case not too long ago)it became attractive to take a 10 year loan on 80k, versus 7 year loan on 100k. Buyers could now go above their budget a little. Then comes a very attractive overtrade. Sell your 3 year old car, buy a similar or better car brand new and pay marginal differences in the installment. Repackaging of a loan is a very creative task.

Without carrots dangling to entice buyers (without referring to any party but this is like the pot calling the kettle black), the % of people taking 10 year olds probably wouldn't be so high.

Oh well. We have a few years to repent.

EY said...

Hi SMOL,

The man can't dictate what I buy or wear if I don't spend his money, right? :P

Welcome to the 'I make myself happy club!' :D

From,
Fan of AK, Aircon of SMOL

AK71 said...

ROFL! ;p

AK71 said...

Certificates of Entitlement (COEs) for cars closed sharply lower in the latest bidding exercise on Wednesday.

It was the first bidding exercise since the Monetary Authority of Singapore announced restrictions on loans for private cars on February 25.

The biggest drop was in the premium for big cars (Category B — 1,601cc and above), which plunged S$34,577 to S$58,090.

The next highest drop was in the Open category, which dropped S$26,909 (29.3 per cent) to S$S$65,001.

The premium for small cars (Category A — 1,600cc and below) dipped 4.6 per cent, down S$3,612 to S$74,689.


CNA

AK71 said...

Loophole plugged:

The Ministry of Trade and Industry ... announced that, effective today, car buyers seeking vehicle loans in the form of hire purchase or conditional sale agreements from non-MAS-regulated credit/leasing companies would be subjected to similar loan limits imposed by the MAS. The limits will be introduced via the new Hire Purchase Regulations, made under the Hire Purchase Act.

Besides the credit and leasing companies, licensed moneylenders will also now be subject to the same vehicle financing restrictions as banks.


The Business Times, 6-7 April.

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