Cooling measures drive up car loan interest rates

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#1
Those who complain seem to always want the best of both worlds - low interest rates AND tighter financing options; but they are already paying less total interest even though the effective rate has gone up - this is because the loan period has shortened and the loan quantum has reduced due to the new rules.

So my point is - if you're not happy, don't borrow!

The Straits Times
www.straitstimes.com
Published on May 23, 2013
Cooling measures drive up car loan interest rates

All banks, except DBS, have raised rates to 2.68%; more tweaks expected

By Christopher Tan Senior Transport Correspondent

THE widely expected rise in interest rates for car buyers has materialised, since measures to restrict the amount and tenure of loans were introduced in March to cool the market.

As of yesterday, DBS Bank remained the only bank sticking to the old rate of 1.88 per cent per annum. All the others have raised interest rates almost uniformly to 2.68 per cent since the first mover - believed to be Citibank - revised its rate upwards in March.

The higher charges came after the Government announced measures in late February to cool the motor market, including restricting the loan amount to no more than 60 per cent of a car's purchase price, to be repaid in no more than five years.

As a result, banks and other lenders faced a substantial drop in interest earnings, which they are now trying to recoup with higher interest charges.

Consumers will now spend more on car loans. For instance, a $100,000 five-year loan at the new rate translates to interest amounting to $13,400 - up from $9,400 if the lending rate was 1.88 per cent. That works out to a 43 per cent increase.

But it is still less than half what the banks would have earned before the curbs, when car loans were unrestricted.

As a result, observers reckon there may be further adjustments. There is wide speculation that banks will increase housing loan rates as well to shore up earnings.

Lenders were reluctant to comment on the rate hike, with most saying they were merely "following the industry".

Citibank, which industry players said was the first to raise the interest rate, refused to comment. Even DBS, which has stuck to the old rate, preferred to remain silent.

But the public is not taking kindly to the increased charges.

Property agent Eddie Low, 63, said: "That's not right. This development had nothing to do with the market - it was government regulation. So I don't think they should simply pass the cost on. The consumer is bullied in many instances."

Mr Low, who owns an eight- year-old Nissan Sunny, said he is hoping certificate of entitlement (COE) prices will fall so that he can get a new car.

COE premiums have fallen from over $90,000 since the curbs to settle in the low $60,000s. But yesterday, there was an upward surge with premiums rising to as high as $67,304.

Motor traders said the increase in interest rates has not had a significant impact on consumer sentiment.

Mr Chin Kee Min, senior manager of Kia distributor Cycle & Carriage Kia, said: "Compared to the cooling measures, this is nothing."

Mr Raymond Tang, secretary of the Singapore Vehicle Traders Association, said demand for used cars has been strong since the Government lifted the loan curbs on second-hand cars for 60 days.

This was because being able to borrow up to 100 per cent of the purchase price and to repay the loan over 10 years was a huge draw.

christan@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
I'm very underwhelmed by this journalist's logic. What about cooling measures on property? Why didn't they result in an interest rate increase?Huh
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#3
actually it is sensible move for banks and other financial institutions. The loan is probably peaking, and raising the interest rate is a good move for profit in the next few years.
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#4
(23-05-2013, 08:35 AM)freedom Wrote: actually it is sensible move for banks and other financial institutions. The loan is probably peaking, and raising the interest rate is a good move for profit in the next few years.

If we go by your logic, why stop at car loans? Why don't they raise housing loans, corporate loans etc?
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#5
(23-05-2013, 08:44 AM)HitandRun Wrote:
(23-05-2013, 08:35 AM)freedom Wrote: actually it is sensible move for banks and other financial institutions. The loan is probably peaking, and raising the interest rate is a good move for profit in the next few years.

If we go by your logic, why stop at car loans? Why don't they raise housing loans, corporate loans etc?

Certainly they will not stop. Car loan amount is much smaller than mortgage.

So the increase of interest rate for mortgage will be much slower a process than car loan.
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#6
(23-05-2013, 09:53 AM)freedom Wrote: Certainly they will not stop. Car loan amount is much smaller than mortgage.

So the increase of interest rate for mortgage will be much slower a process than car loan.

I cannot agree with your logic but I think it will not be fruitful to argue over it now. Let's come back a year later (if we still remember this thread) and perhaps things will be clearer.
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#7
THEORETICALLY with shorter tenor and lower LTV ratio the credit should be better hence interest cost should go DOWN.

But the absolute interest earnings for the banks in 5 years are too low for their operating cost. Hence the interest cost increase is to make it worthwhile for them to do car loans vs opex. Housing loans do not have such issue when the absolute interest income for the bank more than compensate the opex.

Another case of finance 101 theory vs reality mismatch
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#8
Hi Musicwhiz

There is an excellent reply today in ST Forum page by Mrs Ong-Ang Ai Boon. Perhaps you can post it here. Thanks.

I rest my case.
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