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Tag: Loan

  • MAS eases curbs; where is COE headed

    MAS eases curbs; where is COE headed

    If you’ve been following the news, you should have heard about MAS easing the loan curbs. So where is COE headed? Most people say it will go up, but I think it will only inch up marginally.

    Reducing downpayment by 10% will help buyers reduce their upfront commitment by around $8K (for a $80K car). If COE shot up in excess of $10K, e.g. an $80K now costs $90K, it would defeat the loan curbs ($32K vs. $27K downpayment).

    The extension of loan tenure from 5 to 7 years makes monthly commitments easier on the pocket, but right now most buyers waiting on the sidelines are likely more cash strapped. Remember: it is supply and demand that causes COE prices to move.

    Also, the number of COE quota available right now actually meets or exceeds that of 2008 when COE was <$20K. With so many cars going to the scrapyards, we will see this quota sustain for quite a while. I believe this is the primary reason why the loan curbs were eased — otherwise we may see $20-30K COE by 2018. I believe the loans will be further relaxed in 2017 (to 80% + 8 years) if total quota exceeds 2,500 in each bidding. If the quota remains fairly constant, then there will be no change.

    In summary, I think COE prices will not move much… it may rise a little bit, with a little spike in the short term due to sudden demand, but should eventually stagnate around $50K for both Cat A and B.

    P.S. I can’t help but feel that LTA really screwed up on Cat A vs. B differentiation even when they had the one opportunity to do it right.

  • 2016 COE trend and illogical used car prices

    2016 COE trend and illogical used car prices

    Why are used car prices so ridiculously high when COE prices are down? It does not make sense, or does it?

    New cars are actually cheaper (in depreciation) now

    A brand new VW Golf (Mk7) 1.2 TSI was going for $98.8K over the weekend. This translates to a depreciation of approximately $9.5K/yr. If you do a search for VW Golfs on the second hand market now, there’s nothing below $11K/yr, and most are averaging $12K/yr — even the Mk6 1.2 TSI ones.

    A brand new Subaru Forester 2.0 (non-turbo) was also going for $116.8K. This translates to a depreciation of only $11K/yr for a brand new feature packed car. If you look at the second hand market, there’s nothing below $12K/yr for a Forester.

    So what has caused used car prices to go topsy-turvy?

    Here’s what I think is happening:

    1. The loan curbs (min. 5 years + 40% downpayment) priced many people out of the market. The high downpayment meant that people with less cash could only buy older cars. 5 year old cars seem to be in a sweet spot.
    2. People are adopting a wait-and-see attitude in hopes of further COE drops, so they are buying used cars with short lifespan to hold out for another year or two before they get a new car in 2017-2018, the predicted the “COE tsunami” years.
    3. Rising interest rates and weakening global economy in general deters people from spending on cars or luxury items.
    4. Old cars with 1-2 years left are being bought by rental companies turning them into private Uber fleets.

    The Uber-iztaion of Singapore

    In mid-2013 — when COE was some $60-70K — I bought a Subaru Impreza 1.6A with slightly over a year left of life at just below $5K/yr. If you look at the second hand market now, Imprezas are going for around $10K/yr. That’s a whopping two-fold increase. There’s practically no automatic Japanese sedans below $7K/yr right now.

    This whole Uber thing took off in the last 1 year or so, i.e. some time around mid/late 2014 till present. I strongly believe this is what wiped a lot of 8-9 year old cars off the market. These old cars were the best targets for rental because the risks are low — if the car is problematic or destroyed in an accident, just scrap it.

    Uber, renew or buy?

    I’m being asked quite often: Should I sell my car and go public transport/Uber, or renew COE, or buy a new car now?

    If you can live with public transport or Uber, why not? It will be cheaper than any form of car ownership. I’ve done my math and any basic car ownership right now would cost you somewhere between $14K-16K/yr for the car, road tax, insurance, fuel, parking, etc. If you have a $1K/mth budget for Uber, I’m sure you’ll be going places comfortably.

    But if you really need the convenience of a car, and — here’s the important part — you have the cash to spare, you can either renew 10 years provided your car is in good mechanical condition, or buy a brand new car with better technology, fuel economy, warranty, etc. Used cars are just so ridiculously priced right now that it doesn’t make much sense.

    If you are thinking of selling your 5-year old car and going Uber till COE drops, IMHO, now is the time.

    Where will COE be headed?

    I think COE will still continue to fall a little bit over the next 1-2 years, but I think it should bottom out at around $40K+. There’s a general resistance around that point, because at $40K+ the entry level Japanese / Korean cars could be going for around $70-80K and that seems comfortable for most people (and spells trouble for a lot of used car dealers).

  • 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.

  • The truth about offsetting loans with investments

    I’ve often heard people say it is easy to overcome the low car loan interest rates. While it may be 1.88%, the effective interest rate is much higher than that, about 4%.

    And people will tell me that it is easy to find something with an interest yield of 4%.

    I tell them their maths fail. Why?

    Disregarding all risks and investment yield fluctuations, simple arithmetic says that one must invest the same amount over the same period of time as the loan quantum to yield the same returns.

    This means if you took a $100K loan for 8 years, you need to plonk $100K into an investment yielding the same interest rates for 8 years.

  • Balloon scheme (loan) is not what it sounds like

    Addendum, Oct 2017: I have further simplified this article for the benefit of the many visitors every month. This article is one of the highest hit articles on my blog, and it is actually a bit worrisome that even banks have joined in to offer the scheme now. The MAS rules for car financing have also changed, so many of the figures have been updated to be current. Please support me by clicking on ads that interest you. It will help me keep this blog alive and allow me contribute more articles to the Singapore motoring community.

    I came across a loan scheme called the “balloon scheme” recently. Some people say this loan scheme existed a long time ago, but I have not heard of it until recently so it’s new to me.

    My first thought: “Wow, these financial tools will evolve in 101 ways just to get people to take a loan.”

    But before reading on, please take some time to understand the Singapore vehicle taxation structure. Without that knowledge, it may be difficult to understand some of the terms used here.

    So what is a Balloon Scheme?

    The Balloon Scheme is deferred payment scheme designed to reduce the monthly instalment sum. The flip side is high interest rates and a large sum to pay at the end.

    Technical details: The interest rate is applied to the full loan amount, and then the minimum PARF rebate (or “scrap value”) is deducted before dividing into monthly instalments.

    The lower monthly instalments make it seem extremely favourable especially if you are buying an old car, but I would suggest to avoid balloon schemes. Why?

    Example of calculations

    Let’s say you bought a used car for $100K and intend to get a 5-year loan for $60K. The car has a min. PARF value of $10K.

    Typical Loan Balloon Scheme
    Car price $100,000 $100,000
    Min. PARF $10,000 $10,000
    Down payment $40,000 (40%) $40,000 (40%)
    Loan amount $60,000 (60%) $60,000 (60%)
    Interests $5,640
    @ 1.88% x 5 years    		 $8,040
    @ 2.68% x 5 years
    Total Instalments Payable $60,000 + $5,640
    = $65,640    		 $60,000 + $8,040 – $10,000
    = $58,040
    Instalments (Monthly)  $1,094/mth $967/mth
    Final Instalment $1,094 $10,000 + $967
    = $10,967

    That’s a $127 reduction in installments! Yeah! Let’s do that balloon scheme now!

    But wait… in addition to the extra $2,400 in interests paid, there is also a final sum of $10,000.

    The implications of the final sum

    If the COE expiry coincides with the end of the loan period then it is fine because the min. PARF rebate from the government would cover the final sum, but what if…

    What if the car has several years to go?

    You will have to cough up this $10,000 to keep your car. Or you’ll have to dispose the car prematurely and you will stand to lose even more (see below).

    What if you were stuck in a bad financial situation?

    In an event that you have to dispose (i.e. sell) the car prematurely before the end of the loan term, you will likely suffer even more financial losses.

    Early disposal

    Here is an illustrated example of an early disposal/sale.

    Selling at 8th year Selling at 10th year
    Car price $100,000 $100,000
    Sale price $20,000 $10,000 (Min. PARF)
    Years 8 years 10 years
    Depreciation ($100,000 – $20,000) / 8
    = $10,000/yr    		 ($100,000 – $10,000) / 10
    = $9,000/yr

    It is clear that selling the car at the 8th year would have cost the owner and additional $1,000/yr over 8 years, that is total of $8,000! This has not taken into account any financial charges and fees should the car be disposed even before the end of the loan term. (Read up on the Rule of 78 if you would like to find out more.)

    The reason for this is because an older car should depreciate less, so the price of the car dips more than it depreciates (in a straight line) as it ages. There are some specific situations, however, that this may be not true and will depend largely on market forces at the time of sale, e.g. high COE prices would result in high car prices.

    Final words

    If you have to use the balloon scheme to afford a car, chances are that you are stretching your finances.

    The two biggest purchases in our life would likely be a property and a car; but unlike property, a car in Singapore is not an asset. It depreciates in value quickly from the moment you buy it.

    My advise would be to avoid the balloon scheme and find a car that you can comfortably upkeep.

    Addendum, Oct 2014: Do also read the updated article I wrote here in 2014: How to buy a used car in Singapore