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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.
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