- Published: Thursday, 26 May 2016 18:54
New rules for car loans could cause COE prices to climb, but cars should become more affordable
SINGAPORE — Buying a car in Singapore is about to become easier. The Monetary Authority of Singapore (MAS) has just announced that it will be relaxing the curbs on car loans that it put into place in 2013.
The rules were introduced to keep car buyers from over-extending themselves financially, and to “moderate the demand for cars and COEs”, the MAS said in a statement today. They capped car loans at 50 to 60 percent of the purchase price, with a repayment period of five years.
From tomorrow onwards, for cars with an OMV below $20,000, buyers will be able to borrow up to 70 percent (previously 60 percent) of the car's purchase price and pay it back over seven years.
For cars with an OMV above $20,000, buyers will be able borrow up to 60 percent (previous 50 percent) for seven years.
The news rules will be extended to non-MAS regulated entities which extend hire-purchase loans for motor vehicles. The Ministry of Law will also require licensed moneylenders to comply with the revised financing restrictions, said the MAS.
The new rules should be welcome news for car buyers, who will now have to come up with less cash upfront for their purchases. As with any regulation change, however, there will be winners and losers.
Here’s the full fallout we expect to see.
CARS WILL BECOME MORE AFFORDABLE
Duh. Consider a Toyota Corolla Altis (below), currently priced at $117,888 with COE. Previously, the down payment would have been $47,156, with monthly repayments of $1,337 (assuming interest rates of 2.68%) for five years.
Under the new rules, the down payment drops to $35,367, while monthly repayments should fall to $1,167 for seven years.
This example shows the most significant impact of the new rules: lowering the amount of cash required up front by $11,789. But...
CARS WILL BECOME MORE EXPENSIVE
Paradoxically, as cars become more affordable, they will also become more expensive. With the hurdle for buying a new car lowered, demand for them should increase.
The stiffer competition for COEs resulting from that will raise prices, although it’s too early to say by how much.
Put another way, the tight rules introduced in 2013 had the effect of bringing COE prices down. Reversing those rules will have the opposite effect of bringing prices up.
VEHICLE SALES WON’T RISE
It’s tempting to imagine that, with cars easier to afford, motor traders will rack up sales as more people flock to showroom.
But collectively, the motor industry can only sell as many cars as there are COEs — by definition, the Quota System controls the actual number of cars that can be sold in Singapore. New loan regulations won’t affect the COE supply, only COE demand.
BANKS WILL LOWER INTEREST RATES
With up to seven years to make their money off borrowers, banks will be tempted to ease interest rates and fight for market share.
The opposite happened in 2013, after all — once the maximum repayment period was cut from 10 years to five, banks immediately put up interest rates.
PARALLEL IMPORTERS WILL LOSE SALES TO AUTHORISED DISTRIBUTORS
Parallel importers and vehicle traders who found a way to circumvent the previous loan restrictions stand to lose out, while authorised distributors who duly followed the law should see their market share increase.
Essentially, parallel importers found way to work with entities not regulated by the MAS to offer bigger loans than banks were able to.
The announcement today that the loan curbs would be extended to companies governed not just the MAS, but also the Ministry of Trade and Industry as well as the Ministry of Law should close that loophole, meaning that customers blocked by a lack of cash for down payments will no longer be able to skirt the rules with a parallel importer’s help.