tzlee.com/blog

Tag: Inflation

  • On car loans again

    I just read this article.

    I found this statement by Tan Huey Min, general manager of Credit Counselling Singapore a little misleading:

    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.

    First off, back when 100% 10-year loans were allowed, the interest rate was 1.88-2.8%. EIR 3-4%.

    Now that MAS capped loans to 50% 5-year, banks raised interest rates to 3.25%, or EIR 6-7%.

    Given an arbitrary amount of $100,000. This is how it works out:

    10 years, 100% loan @ 1.88% = $18,800 in interests
    5 years, 50% loan @ 3.25% = $8,125 in interests

    Sure, the interests would have reduced by over $10k+ but these have not taken into account the time value of money, i.e. inflation.

    Singapore’s inflation rate averaged around 4% over the last 5 years. Given that the old EIR was 3-4%, it was actually cheaper to take the loan.

    Note also when you stretch a car loan, the real EIR decreases.

    Here’s what $50K (the down payment amount) if hedged against inflation would work out over 5 years at 4%:

    $50,000 (P) x 4% compounded (r) x 5 years (Y)
    Future value = P(1 + r)^Y = 50000 x (1.04)^5 = $60,832.65

    Amused? No. It is exactly that. The interest rates have risen taken into account the reduction in banks profits.

    So to the cash-rich savvy investor, down paying 50% may not make sense with the revised interest rates then.

    However, if one does not invest wisely, sure… avoiding the debt would be good.

    Now with this blog post I did not say to go right now and take a full loan on a car while you still can. Taking on loan with leverage need to be weighed against risks. The most important risk to manage is the ability to bail out at any time.

  • Inflation vs Interest Rates in Singapore

    So 2010 inflation was at 2.8%, and this year the government estimates it to be at 4%.

    I’m actually wondering how these figures came about. (JJ, I know you’re reading this. Please enlighten – you can leave a private comment if you want.)

    Are property prices part of the index used to calculate inflation in Singapore? How about vehicle prices? How about the fact that CPF has raised it’s maximum monthly cap to $5,000 and increased employer contribution by 0.5%?

    My estimate is that inflation has in fact risen a good 5%-8% in 2010 and will be much higher in 2011.

    If you compare Singapore and maybe New Zealand which has similar inflation rates, the interest rates in Singapore are at a pathetic 0.06%. The interest rates in countries like Australia and New Zealand are at 3-4% – at least close to that of inflation. Even USA with an inflation rate of 1.6% in 2010 has an interest rate of 0.25% – four times that of Singapore.

    What this means is that money my bank is shrinking 3.94% every year. Forget it, make that 4%.

    So on top of putting up in an overcrowded nation and dealing with my noisy neighbours, my savings are actually shrinking. For every $10,000, that’s $400. Wow.

    If I don’t want risks and want my money to grow or at least catch up with inflation, what do I do with it?

    References:
    http://www.rttnews.com/Content/AsianEconomicNews.aspx?Node=B2&Id=1571224
    http://www.tradingeconomics.com/Economics/Stock-Market.aspx?Symbol=SGY
    http://www.tradingeconomics.com/Economics/Stock-Market.aspx?Symbol=NZD