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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.
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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.
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