Brother, Where’s My Car?

It seems that many initiatives were rolled out in the Singapore budget speech 2013. Most of the items were mostly for the lower or higher income group with little touching the lives of the bulk of the population, the middles class. Hence, most of the issues were over shadowed by one that strikes the hearts of the majority of people belonging in the sandwich class. And that is the new measures on car financing, indirectly affecting car ownership.

The new rule is for a maximum financing of 60%, i.e. down payment of 40% required, and maximum loan tenure of 5 years. (Unfortunately, I just read that it does not apply to unlicensed credit firms that can are legally allowed to work with car dealers to provide financing.)

The common complain is on the analysis of how much down payment and loan installment to pay. Here is how it goes: A reasonable price of a common new salon car, $120,000. Down payment = $120,000 * 40% = $48,000 (Close to $50,000). Monthly loan installment over 5 years without factoring interest yet = $120,000 * 60% / (5 * 12) = $1,200. And so the story on affordability for car ownership is that one has to have a ready cash sum of close to $50,000 and be prepared to spend about $3,000 every month on car usage and installments (assuming $1,500+ of usage, factoring in petrol, parking, maintenance, road tax and insurance and some rounding up due to loan interest). So, can the average middle class have their lifestyle wants (some may say it is a need) expectation of owning a car fulfill?

I cannot argue with maths and the sums are in order. However, what I am wondering was what has changed fundamentally before and after the budget announcement? By fundamental, I mean the price of the car, the $120,000 in the example. So, are we saying that when loans were flexible, cars were affordable and now with loan tightening measures, cars are no longer affordable?

In my opinion, the crux of the issue is why cars are so expensive in the first place. In fact, with more flexible loans, cars are even more expensive due to factoring in of interest. The new budget measures are just a wake up call for people to make more prudent financial decisions. If one cannot afford the cost of the car, regardless the terms of the loan package, do not over stretch oneself. It is similar to purchasing smaller items, if one cannot afford that, does it make sense to buy on credit and pay over the next few years on revolving credit with high interest rates?

Back to big purchases, it is similar to making financial decision on selecting a property. If one cannot afford that Condo/Exec Condo or 5 room flat, there are options for 4 room or even 3 room flats. Just because the loan can be stretched to 30 years or more with only 10% down payment, it does not make the place any more affordable for the same selling price. However, point to note, before people flame on this, one major difference to take into consideration is that a property is an asset that has the potential for appreciation, but a car is almost definitely a depreciating liability (not an asset, considering the on going requirement for maintenance whether it is used or not). My point is more on financial prudence when making major purchases.

Again, keeping political issues aside, on WHY Singapore has reached the current levels of affordability of car ownership, the situation is as such. Hence, it is important not to focus on the loan financing but to focus on ones lifestyle needs and affordability. As the financial freedom concept goes, to be financially free, one should not have any debt and passive income exceeds lifestyle expenses. Therefore being debt free means any lifestyle requirement as far as possible should not be financed with debt.