What the new MAS rules for car loans mean in $ terms?

ASSI has many blog posts on the ownership of cars in Singapore. A few of these are about the cooling measures implemented by the government to inject some financial prudence into those looking to buy a car.

Of course, there were people unhappy with the cooling measures but I feel that it is like taking medicine. It probably doesn't taste good but if we need it, we should take it because it is going to make us better. 

For those who need to take a loan to buy the car they want, not buying the car is probably going to make them financially healthier. I don't think that is a bad thing.

Anyway, for whatever reason, the government has decided to make it easier for people to buy cars in Singapore now. Notice I did not use the word "own" because as long as the car is not fully paid for, we don't own it. We get to use it but we don't own it.

So, what are the changes? 

Car buyers are allowed to borrow up to 70% of the asking price (for cars with OMV of $20,000 or less) and for up to 7 years instead of only 5 years.

I have previously said that we should try to keep the loan figure to a maximum of $20,000 and the loan period to a maximum of 3 years if we absolutely need a car and if we absolutely must take a loan. This keeps the cost of financing minimal.

Assuming a price tag of $100,000 for a car, the new rules allow a $70,000 loan to be repaid over 7 years!

What does this mean?

Previously, in another blog post, I said:

... if a person were to buy a $100,000 car and if he were to take a loan for $50,000 at an interest rate of 2.5% per annum for a period of 5 years, he would be paying $1,250 x 5 = $6,250 in interest...

Now, this same person could borrow $70,000 and assuming the same interest rate of 2.5% per annum but for a period of 7 years, he would be paying $1,750 x 7 = $12,250 in interest. 

Financing cost will almost double! 

The more we borrow, the longer we take to repay, the more we pay in interest to the lender.

How is that not wealth destructive?

To take loans to pay for consumption (home renovation, furniture and home appliances are a few examples that come to mind) is generally unwise. 

Cars are very expensive and rapidly depreciating items in Singapore. To take a loan to purchase a car in Singapore because we want one is without any doubt most unwise.

Related posts:
1. Car dealers unhappy with LTA.
2. Car loans are different from home loans.