Costly consequences of trying to bypass car loan curbs

I am glad that the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry finally took notice of the schemes employed by car distributors to bypass loan curbs ("MAS, MTI to look into car loan 'loopholes'"; Wednesday, and "Tackling car loan 'loopholes'"; yesterday).

Many of these schemes have been going on for more than a year.

It is important to limit the amount as well as tenure of a loan because, unlike a house, a car is a depreciating asset.

In fact, its value does not depreciate at a constant rate; there is accelerated depreciation during the initial years.

Moreover, as much as half of a car's value is in the cost of the certificate of entitlement, whose value is rather volatile.

It is important to limit the amount as well as tenure of a loan because, unlike a house, a car is a depreciating asset.

Prior to 2013, distributors had been offering loans of as much as 100 per cent of the car price, for tenures as long as 10 years.

This means that car owners could be locked in for the entire life of the car, with limited ability to sell it before the end of the 10-year period.

Say, a car owner lost his job and is unable to service his loan. Even if he tries to sell his car, he would not be able to get a sufficient amount to redeem the loan, because the value of a car often falls faster than the outstanding loan. He would have to fork out tens of thousands of dollars to redeem the loan.

The situation is worse now, as car buyers who want to borrow more than what is allowed have to incur additional fees, such as for the setting up of a shell company, and pay much higher interest rates.

Are car buyers aware of the consequences of participating in such schemes?

I hope the MAS will step in to better regulate these schemes, and better educate and protect consumers from car distributors whose only interest is to push sales.

Yeo Chee Kean

A version of this article appeared in the print edition of The Straits Times on September 16, 2016, with the headline 'Costly consequences of trying to bypass car loan curbs'. Print Edition | Subscribe