Buyer beware - Loan rates in Singapore

[totoseow]

i am assuming u r a foreigner....this has been the practise since i can remember. APR is also known as effect interest rate. car loans here r not like mortgage...which is call monthly reducing.

what i m gonna say may offend some people, but i firmly believe that if u hv to take a loan to buy a car..u cant afford it. there is only 1 exception; that is when u r convinced that u can beat the effective interest rate or APR. how many of you can say that?

[ClemZ]

OP is probably a first time car buyer !

Even when i was working in the US / UK, similar interest rate calculation as well as rule of 78 applied.

But then again, cars are so cheap in the US/ UK, i paid cash in full for my rides so no need take loan.

In singapore, i think easily over 90% of car owners take loans, but i am not sure how many of them are actually aware of the loan calculation as well as the rule of 78

[kenntona]

Originally Posted by totoseow

what i m gonna say may offend some people, but i firmly believe that if u hv to take a loan to buy a car..u cant afford it. there is only 1 exception; that is when u r convinced that u can beat the effective interest rate or APR. how many of you can say that?

Disagree.

It boils down to the opportunity cost of the loan quantum.

Example - a $250K car. An 80% 5-year loan will incur a total interest payment of $28,000 at 2.8%. What could the the $200K have yielded? It depends on investable opportunities. Over the last three years, the yield of the $200K - from stock market or properties - could be enormous. Not saying an investment portfoilio of $200K is huge, or that $200K could buy a property, but given the margin nature of local investments, the return on the $200K is tremendous, if the owner has the investing acumen. Even a conservative portfolio would have earned an average of 4.5% - 5% dividend yield over the last 2 years, not taking capital gain into account.

The exception is a pocket so deep that $200K loan quantum seems so insignificant.

Of course, if the loan quantum has no opportunity cost, i.e. a prolonged poor investment environment with poor risk/reward ratio, then paying the full sum makes sense. However, who could time the investment environment? Given that most car buyers take a bigger appetite for cars only when things look good (no layman will commit more when they fear recession and retrenchment in the horizon), it always inherently means they will wanna keep cash and liquidity ahead of any investment opportunity. In that mental framework, leveraging on car purchases makes more sense that leveraging on any other investment - stock market, business, or properties.

[totoseow]

ken that is exactly what i m saying. how many people can u convince to go invest that 200k or leverage it to punt property? i doubt many will do that. instead they do not understand effective interest rate and focusing on the headline number of 2.8.

there r good debts n bad debts, n i do not think car loans here belong to the first category.

[pilotsnoopy]

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HUAT AR!

Lai lai...pay 30% tax to gahment only...after that 1 car each for all futsal bros!

[iScoupe]

seriously car loan in singapore is the most easy to calculate. just the term & condition like lock up period, minimum loan & period to enjoy low interest only ma.. if want cash back then go take high interest like 3.5% - 4.5%.
conclusion ,
if you have lump sum & high risk taker, take low interest car loan & invest the rest in market to leverage the car loan.
if you low risk, fully paid the car & dun think abt it.
my 5 cents onion...

[ca-dreaming]

This was exactly my point. Most people refer to car loan and 3.5% in the same brearh as shown in the previous email. The point is that they should really be referring to the effective rate or the annual rate which can be as high as 6-7%!

Thanks for the warm welcome guys and great discussion

[nikleica]

hi all....

please note that most car loans offered in singapore are "hire purchase loans" and as such are administered under the hire purchase act.

it operates differently from a reducing balance loan which applies to home mortgages.

5.3% APR is considered cheap if you use the Prime Lending Rate as a comparative benchmark.

however, if one uses the deposit rate as a benchmark, you will realise that it might be better to borrow less and use more cash for a car purchase.

sadly enough, most car owners are more likely to be "hirers" than owners. it is almost equivalent to a lease than ownership.

[totoseow]

how many of us have access to prime rates?

[kuvesh]

Can someone explain to me rule of 78?

This is some sort of prepayment penalty right?