Posts
Some readers might remember my blog post on getting a new car some two years ago. I might not have revealed then but I did not take a loan for that purchase. It was the first time that I bought a car without the help of a loan and this is the way I like it. So, my car is an asset, a depreciating asset but still an asset.
Some asked me why I did not take a loan since interest rates are so low and I could invest my money for higher returns? This is a dangerous way to think, in my opinion. The returns from my investments lack certainty but the required monthly repayments to the lender are dead certain.
Borrowing in order to finance personal consumption is not a good idea, is it? A car is for personal consumption, is it not? Well, sometimes, we really need a car for various reasons and what if we could not avoid borrowing to finance the purchase?
Prior to buying my current car, I would make sure to take a loan of no more than $20,000 to be repaid over 3 years. That worked out to a monthly repayment of some $600 per month which was comfortable for me. So, for example, if the price tag of a car was $80,000, I would make sure I had at least $60,000 which would be made up of the trade in value of my old car and cash.
I do know of people who would borrow 100% against the value of a car and some would take 10 years to repay the loan. I cannot imagine why anyone would want to do that.
So, to protect potential buyers lacking in financial prudence, I believe the government's new measures are in the right direction:
Singapore’s central bank said the tenures of motor vehicle loans will be capped at five years, with the maximum motor vehicle loan amount pegged to 50 or 60 per cent of the vehicle’s purchase price, depending on the Open Market Value.
Some banks here had offered financing of up to 100 per cent of the purchase price for new cars, with tenures lasting up to 10 years. (Source: TODAY online)
Think carefully. If we need to borrow heavily in order to buy a car, can we really afford it?
Earlier this morning, I read an article which reported that the lower and middle income groups may be priced out by the new measures. It is understandable that car dealers are upset as their business could be negatively affected.
Eddie Loo, managing director of CarTimes Automobile, said: "We have a mixture of customers —— those who come and buy (with) cash, but there are definitely people who want a hundred percent loan.
"So it’s almost like 50—50 kind of market that people come into. So to penalise those who need a car and have to fork out 50 per cent of the loan amount, I think, the timing is not very correct.
Do I sense some sympathy from Mr. Loo towards people who need a 100% car loan to buy a car? What do you think? Mr. Loo thinks that "the timing is not very correct". When is a correct time for encouraging financial prudence?
Why not hear what buyers have to say?
John Molina, a prospective car buyer, said: "I want to buy a car, but because of this, I mean it’s impossible for me, or it’s almost near—impossible."
Another prospective car buyer, Mark Lim, said: "For those people who are really very rich, to them there’s no effect —— today I want to buy a Ferrari, for example, I don’t even care about how much is the downpayment."
Mr. Molina wants to buy a car. Well, if he had the money to do so, he could satisfy the want. However, since he finds it "impossible" to do so with the new measures in place, he probably is and was a poor candidate for car ownership.
As for Mr. Lim, since it dawned upon him that he could buy a car without a care for how much is the downpayment if he was "really very rich", why not concentrate on getting rich first?
Read article:
Middle & lower—income groups may be priced out of car market: dealers
Related posts:
1. Bought a new car.
2. If we are not rich, don't act rich.
3. Good debt is always good?
4. Slaving to stay in a condominium.
5. The very first step to becoming richer.
Bloggy Award
25 comments:
Hi AK,
Been following your blog for a while now. Thanks for sharing your words of wisdom!
I also like the new limits on car loans.
I think the objections arise because people want a car NOW and are not willing to delay their gratification. If they saved the money they would otherwise have used for servicing the car expenses (Is 1.5k/mth a reasonable sum?) they would be able to save up that 40-50% needed for downpayment in maybe 4 years. Even less time needed, if they consider buying a used car instead of a new one. And when they do eventually buy the car, they'd be in a much stronger financial position than if they had gone with a 100% loan. And they'd be able to avoid paying so much interest to the banks too!
Cheers,
KH
AK: I couldnt agree more with you! Financing consumption with debt is just wrong, period. Anyone who needs to be convinced should be reminded that the banks make most money out of consumer finance, so who wins here?? And spending financed with debt is arguably at the root of the current troubles in the US and Europe.
Personally I think there are only two reasons to take a loan: to buy a house or to build a business.. For the more sophisticated you could potentially add some financial leverage with well-calculated and managed risk (e.g. taking a loan against 20% of your stock portfolio to invest more)
Jay
Hi KH,
I like being in a stronger financial position like your said. Do anything from a position of strength and we are more likely to come out on top of things.
I hope more people would support the new measures like you have. :)
Hi Jay,
Some would argue that the home we stay in is consumption and we should pay off the loan, which for most of us is unavoidable, as soon as possible.
I am averse to taking loans in general but recognise them as necessary in certain instances.
Leverage up to invest in stocks? I am sure it has worked well for more sophisticated investors. I belong to the less sophisticated camp. ;p
Even before these cooling measures came about, I bought my car under similar conditions - 3 years loan.
Rationale: why pay the interest?
I guess the counter argument someone could give me would be because they dont have the money now but they wanna enjoy the "now". Why save and scrimp for years before enjoying a car when you can enjoy it now but pay alittle more?
I guess that's quite valid, much akin to paying instalments to buy a new sofa or LCD TV. Why buy them one after another in full amount and delay your enjoyment when you could buy both and pay everything thru instalments?
Delayed gratification is something we need to inculcate in our next generation. I'm thinking how to teach my son. :D
Hi Ray,
Indeed, why wait? We can have everything on hire purchase and enjoy everything now! ;)
If we look at it from a different angle, without people who buy things on hire purchase, could our GDP suffer? Then, wouldn't all of us be worse off? We should thank these people, shouldn't we? ;p
You are really a kiasu father. Give the boy a break. Hahaha.. Hmmm... Maybe we should start a pre-school to teach financial prudence!
AK,
The word Kiasu has bad connotation. I prefer "planning ahead". After all, the shaping years of a child start around 1 year old. I wouldn't want to be planning on how to educate / which direction to educate at that time. It's better to always plan ahead.
Pre-school? haha, thought about it but too much admin work to do. Finding / renting a place, hiring the staff, managing the renovation, ensuring hygiene etc... too much work for me. I dont have entrepreneur blood... (actually i do, my dad owns a shoe shop so by right i do have the same kind of blood... maybe i should say i dun have the guts to fail in ventures)
Hi Ray,
OK, planning way ahead! ;)
A rose by any other name would smell as sweet!
A distinction without a difference, my friend. LOL! :D
HI AK71,
I belong to the group who took full loan ;)
Yes the I interest I paid is higher than if I had only took a loan of 50%.
But I got no regrets, Dun wanna start thinking about owning a car when I started a family and kids on the way.
Because I believe by then the priority will be on the kids.
It's different ways of looking at things, the emotional and rational choice.
AK:
You make a good point about the economic impact. Indeed the economy works better if people consume on credit. But do that too much, it eventually you have to pay the price. Just ask the Spainiards, Americans and Brits... Eventually everything has to come back to 'normal' (i.e. income = spending), and unfortunately everyone has to do it at the same time now..
Hi Jimmy,
I am sure that there are many views on any one topic. I am also sure that every view is right in its own way. That is the power of rationalisation! :)
Hi Jay,
Many think that it is OK to owe money as long as payment is made promptly. Of course, when the ability to pay is intact, all is well, isn't it? ;)
A bit of wine is good for the heart but too much and it destroys the liver. A bit of credit can be a good thing but when we see people getting drunk on cheap debt, alarm bells should go off.
AK,
I generally don't like "paternalistic interventions", although I appreciate the well intentions.
I believe people would drive more carefully if there were no airbags or safety belts. Even better if you crash, your car would burst into flames and you die.
Morbid exaggeration aside, if we over protect, we may do more harm.
People won't think of the critical things themselves if there's always the big man to think for us.
Hi AK 71,
How you manage to buy a new car without loan? Isn't Borneo Motor or other car agencies price the new car more expensive if you don't take at least a one year loan from their sponsored Bankers? They will withdraw all or some of the price discounts or "free bees".
i can't agree with you more financial prudent seems to be a "built-in" DNA for most people. Either you have it or you don't.
And if you don't, may God bless you in some other ways.
Shalom.
Hi SMOL,
I do not think people would drive more carefully if their cars did not have airbags or safety belts.
I remember the days when I was little when cars didn't have airbags and although they had safety belts for the front seats, people did not use them.
It was many years later when it became the law that safety belts were used. We were forced by the government to use safety belts.
Unfortunately, in certain instances, we do need a forceful hand to make us do what is right.
Not every person is able to act responsibly if we let them be themselves.
Hi temperament,
Mazda dangled an additional $1k discount if I were to take a loan.
I told the salesman that I would just walk next door and buy a Honda as they did not force me to take any loan.
That did the trick. I got that additional $1k discount and didn't have to take a loan. ;)
As for financial prudence being coded in DNA, I don't believe this.
I was not particularly prudent financially. I still don't think I am very prudent. I am still learning and happy to share what I have learnt.
Anyone can be financially prudent. It is like learning how to cycle. Once we know it, we can never forget it. :)
A bit off-topic, but I agree with the point on seatbelts and airbags. If people were rational and cared about their safety, we wouldn't see motorcyclists go without helmets in other countries where enforcement is less strict. So sometimes government or some authority has to come in and dictate the rules.
This is the best measure on car loans I have seen in the last 10 years! (Literally)
The car loan market was liberalized in 2003, to the detriment of many car owners who leveraged up to their eyeballs to purchase a fancy car. I was actually quite against all this as my mantra has always been - no debt, don't feed the banks. It's amazing that so many people borrow 90%-100% using maximum 10 year tenure.
With the new rules in place, demand would drop substantially. This in turn would cause COE to fall the overall price of the car would fall, thus requiring less downpayment. It is supposed to be a win-win for those with cash and the financial muscle to buy a car.
Anyhow, I still don't think I need a car, so I'll keep my cash for investments haha!
Hi MW,
Blessed are those who do not need a car, especially in Singapore. :)
Human beings are full of ideas and in today's front page of The Business Times, it is reported that some potential car buyers are now renting their cars instead! This way, they avoid the hefty 50% downpayment to buy a car! Clever, aren't they? ;)
You can really save a lot if u dont buy car in Sillypore!
Hi Recruit Ong,
Cute avatar! :D
Indeed, cars in Singapore cost way too much!
See: A new car for $75,000?
'Sillypore'? Be careful what you say, dear, for that makes you a rather foolish sillyporean
Be careful what you say dear Recruit.... for that could make you a foolish sillyporean indeed.
For we reap what we sow, get what we say..
It's not unlike real estate or stock investment, isn't it? Do u buy when there way too much hype?
Of coz, Singaporeans complain that they are shut out, married couples use it as an excuse that they would not start families.... the list goes on...
Meanwhile, I see many families - mostly foreigners - with children in tow who survive w/o a vehicle! Only today, a family with 4 children - less than a year to 6 years old - and just ONE pram!
Yes, it's perhaps tiring for the parents - but the older 3 kids obviously well taught.
Credit Counselling Singapore (CCS) said the costs involved in maintaining ownership of a vehicle is one of the reasons cited for car owners falling into debt.
With some credit companies offering higher loans and repayments beyond five years, CCS is reminding the public to be more mindful of their finances.
CCS said 54 per cent of some 1,500 car owners it counselled in the past four years cited a combination of costs like monthly payments, parking and ERP charges as factors that have resulting in them being in debt.
This revelation comes amidst the Monetary Authority of Singapore announcing that car buyers can take loans of up to 60 per cent of purchase price, with a repayment duration of five years.
But 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.
Tan Huey Min, general manager of CCS, said: "To maintain a car in Singapore, on a monthly basis, we’re talking about close to S$1,800 or so, if you really take into consideration the road tax, insurance and petrol and everything, on top of the monthly instalment payment. Over the long run, if you pay off the loan in eight years, the amount you have paid is much more than if you had paid the loan off in five years.
"So that means the cost of owning and maintaining the car again is higher —— so it’s something as a consumer we have to be very mindful and very careful about... You have to think of how you’re going to maintain it over the next few years —— the monthly expenses you need to pay."
CNA, 5 March 2013.
Post a Comment