5 Singaporean Car Financing Schemes/Scams

I just received a flyer under the windshield wipers of my car today. It said, “Buying used car? Up to 90% loan available.” It was an incredible offer. Almost… too good to be true?

The truth is, this flyer breaks just about all the rules in the MAS automotive financing bible which came into play in February 2013:

Commandment #1. “Thou Shalt Receive A Maximum Loan-To-Value (LTV) Of 60% Of The Purchase Price, For A Motor Vehicle With OMV That Does Not Exceed $20,000, Including Relevant Taxes And The Price Of The Certificate Of Entitlement, Where Applicable; And

Commandment #2: Thou Shalt Receive A Maximum LTV Of 50%, for a motor vehicle with OMV of more than $20,000.

Commandment #3: Thou Shalt Not Take A Car Loan Of Longer Than 5 Years.

Given that no loans can be secured above 60% of the car’s value, and not for a tenure of longer than 5 years, where did the dealer get the wherewithal to lend me up to 90% of the car’s price?

From what I understand, the dealer is offering to loan me money that he has already borrowed from banks. Dealers usually borrow a large sum of money from banks and then offer smaller portions of it to would-be customers such as myself.

But beware: these loans come at much higher interest rates than normal car loan rates so that the dealers can make a profit. There’s no such thing as a free lunch, obviously. And you’ll know that the moment you have to place a deposit on the car, because the interest rates make the 10 to 20% deposit much higher than if you had gotten a normal car loan.

Apart from inhouse financing, there’s also other ways to circumvent MAS’s commandments to give you a 90% loan. Namely:

This is what happens when a car’s value is declared higher than its true value, so that you ask for a higher bank loan. Say your car’s sticker price is $100,000 and you could only get a $50,000 loan. If the dealer inflates the invoice to $180,000, you can get a $90,000 loan, which is 90% of the car’s price!

Yet another related trick to lower the loan amount is the overtrade option. For instance, a $100,000 new car will require at least $40,000 as downpayment. In overtrade, the seller will rise the car price to $110,000, and at the same time giving $10,000 more than what the trade-in car is worth.

Although the buyer now needs to put down $44,000 in downpayment, he will now has an additional $10,000 more from his trade-in, making his downpayment only $34,000.

Still, to fully offset the heavy downpayment, sellers will need to inflate the price to a level that is much higher than the market price, and banks may not approve the loan.

The balloon scheme is basically a loan on the car’s price that is minus the PARF value of the car. For today’s new cars, you’ll usually end up with a lower monthly installment.

Say your car’s PARF value is $20,000, and it costs $100,000 new. In a balloon scheme, at an interest rate of 1.5%, after paying the 50% downpayment and deducting the scrap value of the car, your loan will be $40,600, and your monthly installment $677.

Without the balloon scheme, your loan would be $50,750, and your installment per month $846. Some people think that a balloon scheme is more worthwhile because the PARF value of your car is affected by inflation anyway. However, balloon schemes come with much higher interest rates, and hence incur a much higher penalty for early repayment. So you may have no choice but to stick with the car until the end of its 10-year tenure.

This last option has been around for a while. It is similar to car rentals, except that leases have a much longer period (usually 4 to 8 years) and you can drive the car as if it is your own. Some lease companies will even let you keep your own license plates and retain the no-claim discount from your insurer.

Best of all, car leases make it possible for you to drive high end cars without having to put down a 50% downpayment or commit to a 5 year bank loan.

However, lease payments are usually much higher. But remember that bit about not need to foot out a downpayment or commit to a loan? If you are only intending to drive for a short while without tying up your cash reserves, leasing may well be for you.

Now, a friend of mine once asked whether I knew the difference between a scheme and a scam. Apparently, a scam is just a scheme that hasn’t been exposed yet… Guess which of these car financing schemes are actually scams?

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