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Mature and sophisticated consumers lease cars, not buy.

Wednesday, August 14, 2013

From time to time, I would blog about car ownership in Singapore. Without realising it, I have blogged about "cooling measures" for cars at least three times in the last few months.

Now, with the maximum 60% loan allowed for buying cars, some distributors are offering customers the option to lease instead if they find it hard to cough up the initial 40% in cash.

For a Kia Cerato Forte K3 1.6 litre, there is an option to lease for 3 years at about $1,800 a month or for 7 years at about $1,600 a month. Customers don't have to worry about road tax, insurance and maintenance at all. They only have to buy petrol, pay for parking, ERP and the infrequent car wash, I suppose. Sounds attractive, doesn't it?

As usual, the devil is in the details. So, let us look at some numbers:

A new Kia Cerato Forte K3 now sells for $115,990.

If we were to make a 40% down-payment and take a 5 year loan with a 1.88% interest rate for the balance, we would have to make a monthly repayment of $1,268. The car would also be an asset and no longer a liability after the first 5 years.


Click to enlarge.


Cost of car over a 10 year period: $122,479. This might be simplistic and inaccurate but let us assume that the cost of the car in the first 7 years is proportionally at $85,735.

The road tax for this 1.6 litre car is S$738.00 a year while insurance would vary but let us assume that it is $1,500 a year. Maintenance? Based on my car ownership experience, I would put it at $800.00 a year which is realistic if smoothed out over 7 years. So, everything in, we are looking at around $3,100 a year. Over 7 years, it is about $21,700.

Now, if we were to lease the car for 7 years, the bill would total $134,400.

If we were to buy the car instead, in the first 7 years, the "bill" would be: $85,735 + $21,700 = $107,435.

There is a big difference of $26,965 or a $3,852 a year or $321.00 a month!

Now, if we were to drive the car for another 3 years, at the end of the 10th year, we would get back a percentage of its OMV. In this case, we might get back around $9,000 from the LTA. Of course, we would have lost another $36,744 (i.e. $122,479 - $85,735) by then. We would also have incurred another $9,300 in costs (i.e. $3,100 x 3).

However, being able to get back about $9,000 at the end of the 10th year means that we would only lose in each of those 3 years $1,028 a month or some $279.00 lesser than the first 7 years of the car's life.

So, unless there is a good reason not to, it makes sense to buy and to drive the car for the full 10 years or would we rather lease the car for 7 years, give it back and lease another one for another 7 years, losing $1,600 a month all the time?

The "cooling measures" are to protect people who are in financially weaker positions and, in this case, for people who cannot afford the down-payment of $46,396. However, the option to lease offered by car distributors has effectively circumvented the new rules.

Are more curbs from the government needed?

If a job is worth doing, it is worth doing well. So, to further encourage financial prudence, there should be clearer guidelines as to who are poor candidates for such options to lease. Car dealers should then be penalised for flouting these guidelines.

Opel's Mr. David Pang said that, with their option to lease, they are targeting "mature and sophisticated buyers. Those who have travelled and lived overseas can identify with the merits of leasing as opposed to buying."

AK71 has not travelled and lived overseas. He is not a mature and sophisticated buyer. So, you might want to disregard this blog post. I am going back to my well.

UPDATE:
http://singaporeanstocksinvestor.blogspot.sg/2016/05/what-new-mas-rules-for-car-loans-mean.html


Related posts:
1. Cooling measures for cars.
2. Cooling measures for cars spurned.
3. Cooling measures for cars: Buying pre-owned.

16 comments:

MrNg said...

Add another option of buying a second hand car that is 3 years old and use it till the end of 10 years, and it become quite clear how unplatable the scheme is. If u are looking for 3 years lease, u can look for cars that are 5-6 years old, cost get lower and not higher when compared to the leasing.

SnOOpy168 said...

somehow I got the feeling that Sg car prices and financing are really too pricy and not competitive enough.

Remember my stay in the US, most of my friend leased cars instead of out right buying. Logic that after 2 years, you can return the car for another model or an upgrade to something you fancy. Can't remember the finance terms or penalty to this.

Looking at the US based website for an example, http://usnews.rankingsandreviews.com/cars-trucks/financing/car-payment-calculator/2013-Honda-CR-V-1217100/

A. Lease for 24 months is "Lease Deal:

$229 a month for 36 months with $2,599 due at signing; or $300 a month for 36 months with $0 due at signing and no first month’s payment" About US$300 per month.

B. Purchase : Using 1.88% and 72 months repayment with $0 downpayment and 0% sales tax. The monthly comes to $336.

http://usnews.rankingsandreviews.com/cars-trucks/financing/car-payment-calculator/2013-Honda-CR-V-1217100/

Almost the same BUT without the liability of having to drive the same car for 6 years and face the ever increasing repair bills on a older car. Sure, there are limitations to lease, if I remembered about not crossing xx,xxxx miles per year and regular servicing schedule must be followed.

Should my next job requires a car, perhaps i would consider renting or leasing. Both of which I can claim tax deduction which the ownership cost of a private car cannot.

MrNg said...

Just for fun, I went to sgcarmart, saw a 3 yr KIA cerato with 50k mileage ( reasonable) going for 66,800. So monthly instatements is 762. Add your monthly cost of 260, u have only 1020 per month. And u need to pay 762 for only 5 years. 2 years free thrown in. If many like this leasing service, I want to be in this business

AK71 said...

Hi Mike,

Yup, buying pre-owned cars instead of new ones almost always make better sense.

I am glad that this blog post has inspired you to start a new business. ;p

AK71 said...

Hi SnOOpy168,

Thanks for sharing your experience with us. :)

Well, if I were in the USA, I would just buy my dream car. The MB C class!

What I paid for my Mazda2 in Singapore, I could buy a MB C180 and still have enough money left over for another Mazda 2 there. Sob.

Ray said...

it's always better to buy than to rent when the horizon is long, which in this case 7 years - 10 years is considered really long.

Rent would only make sense if we need something for the short term and doesn't make sense to buy it outright.

Mature and sophisticated? More like immature and naive.

AK71 said...

Hi Ray,

You are right!

Come to think of it, I rented a car when I was holidaying in Australia 12 or 13 years ago.

I rented a Toyota Starlet for A$50.00 a day for 2 days.

I am also old and forgetful. :(

Nicholas said...

Very informative!
Always wondered how will they earn if someone lease for 3 years and no one wants to buy a 3year old leased car. Guess that's not gonna happen with the skyrocketing prices.
Remembered a few months ago Porsche had a Panamera lease scheme which was actually quite worth it for a 3 year lease (used faulty mental calculation), then again ,not many can afford it to begin wi

Matthew Seah said...

Hi AK,
Is the maximum lease 7 years?
If that is the case, high chance the cars on lease are 2+ years old cars.

Good profits for the business, bad decisions by the leasee

AK71 said...

Hi Nicholas,

There is no free lunch in this world. In this case, there is no, er, value for money lunch. ;p

From the perspective of a BDM, I must say that this is an ingenious way of getting around the latest rules. Unfortunately, it is not the job of businessmen to care about customers' financial well-being. :(

Actually, I wouldn't mind buying a 3 year old car that was a leased car if the price is attractive and if the condition is relatively good! ;p

AK71 said...

Hi Matthew,

I was under the impression that the cars offered are new. There are 3 lease terms available from C&C: 3, 5 and 7 years.

In any case, it is definitely a good business idea for the car distributors. ;)

SnOOpy168 said...

Just came across this advert.

http://www.oneshift.com/marketplace/ad-details.php?aid=3468&utm_source=oneshift&utm_medium=edm&utm_campaign=aug_2013_mp_newsletter

1 year lease on a civic for $1.3k.

AK71 said...

Hi SnOOpy168,

You thinking of leasing a car?

SnOOpy168 said...

Sticking to public transport & going home by 1130pm.

AK71 said...

Hi SnOOpy168,

Home by 11.30pm? Why so late? That is almost like 2359 in the army.

Where do you go gallivanting? ;p

AK71 said...

From Facebook:

Terence Tan:
Why not just rent the car ? :P Cheaper that way

Matthew Seah:
rent is cheaper meh? really depends on usage rate

Raymond Ng:
If rental is cheaper than how does the car rental company earn his profit?

Terence Tan:
Second hand cars...

Assi AK:
They say sophisticated consumers lease cars and don't buy. :p
Must do apple with apple comparison.
Must compare buying new with leasing new and also buying second hand with renting second hand.
Renting second hand won't be cheaper compared with buying second hand.

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