Anthony is planning to buy a new car. He currently spends all his salary every month. What factors should he consider before taking up a loan?
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Financial Management Question: Week Four
20
Jun
National Economics and Financial Management Quiz 
squeespleenspoon
June 23, 2011 at 7:29 am
In the case of Anthony, it is tempting for him to finance a new car through bank loans because he does not have enough savings but he wants to enjoy the convenience brought by a car. However, there are many factors he needs to consider before taking up a loan.
First, he should ask himself some questions:
1. Do I really NEED the car? Or is it something I merely want?
2. Is the need so urgent that I need to buy it now?
3. What are the consequences of not buying it?
4. What is the market condition? Any reason I should take the loan today? (Very low price or good promotion I cannot miss?)
If he concludes that he does not have urgent need for a car and the market condition is not ideal, he should delay purchasing or avoid accumulating debts and liabilities. In the meantime, he can also save for it and pay in cash later to save on interest charges.
Second, if he feels that he really needs to purchase a car today by taking a loan, he must ensure that he is able to afford the loan payments. In addition, he needs to take into consideration of all the extra expenses incurred such as cost of petrol, car park slot, car insurance and maintenance when he works out his financial planning. Since he spends all his salary now, he has to consider how the debt commitments will affect his standard of living. He needs to ensure that all his debt payments, including the car installment, do not exceed 35% of his total income. To simulate the situation in the future, he should try saving an amount equal to his expected monthly loan installment plus extra expenses.
Third, he needs to carefully choose the type of loan that best suits him and clarify doubts regarding the loan if necessary. He needs to know how the interest is calculated and enquire the effective interest rate if it is not mentioned. He also needs to have complete information regarding early redemption of the loan because there may be a notice period or penalty fee associated with it. It will be wise of him to know the rule of 78, which is how early redemption is calculated. Moreover, he also needs to enquire other fees and charges that would be incurred such as processing and application fee. When he chooses from many types of loans offered by different banks, he should opt for the one with the lowest interest rates and shortest loan period to save on interests. However, he needs to be flexible in making a decision as the loan with the shortest loan period has the highest amount of monthly installment which may exceed the 35% threshold of his income. Therefore, he should choose an affordable loan that saves the most on interest charges.
In conclusion, Anthony should carefully examine the aforementioned three considerations before he takes up a loan.
yayeeus
June 29, 2011 at 12:47 am
Anthony should not only consider the cost to service the loan of the car itself but also the upfront costs like COE, and also maintenance costs, which include petrol, car insurance, servicing and repair.
He should check out the cost of the Certificate of Entitlement (COE) because anyone who wishes to buy a car must first obtain a COE. A certain number of COEs for the different type of vehicles are released into the market every month and prices vary from month to month in this bidding system.
Next, Anthony should find out more about loan packages offered by the different banks and consider which one will suit him better. Although the effective interest rate will be less for a longer period of financing, he should not forget that the economy is subjected to inflation. The future value of this sum of money will be more than its present value, and he will end up paying more in the long run. The value of the car will also drop drastically even before the loan is fully paid for if the loan period is long.
If he decides to discontinue the usage the car before the end of the loan period, he still has to continue paying the loan. Furthermore, most cars only have a warranty period of three years. If the car suffers any damage during the fourth year or fifth year, repair costs have to be incurred and this adds on to Anthony’s financial burden.
With rising costs of living, Anthony may not be able to cope with the loan. As Anthony spends all his salary each month, he has no savings to fall back on in times of need. Since he has no savings to rely on, the loan repayments have to come from his salary. He should calculate and decide if his income, after cutting down on his expenditure, is sufficient to repay the bank loan. If it is not, he should not take the loan as it will only result in overdue payments, which interests are extremely high.
Anthony should try as far as possible to cut down the amount spent on unnecessary items. Besides, with all his income used up, and no savings, he will be unable to deal with an emergency such as a sudden health condition that requires long-term medical treatment. Because of the car loan, he will not have money to seek treatment, jeopardising his own health over a material good.
Anthony should cut down on his unnecessary spending. Ironically, owning a car is also a ‘want’ and not a ‘need’. He should continue to travel by public transport since he does not have the means to own a car yet. Furthermore, it is very risky for him to take up a loan without any bank savings. Therefore, we would advice Anthony to start saving up now and only buy the car when he can truly afford it.
http://en.wikipedia.org/wiki/Certificate_of_Entitlement
http://www.dbs.com/sg/personal/loans/auto-loans/default.aspx
Submitted by Dunman High School
Hu Huijun
Lee Kellie
Samantha Chua
aaarated
June 29, 2011 at 9:49 pm
A new car seems tempting as it is considered a symbol of affluence in Singapore. However, one has to first understand its huge financial burden. First and foremost, do you have the financial capability? Secondly, will the car be productively used? Are there alternatives? Thirdly, do you know the loans available? With these understanding, Anthony can examine his limits, know the type of car to buy, analyse the alternatives, and if needed, choose the most suitable loan.
Anthony must first evaluate his financial capability. For someone with no savings, Anthony definitely lacks in this aspect. Savings are essential in ensuring security on rainy days. It also allows for investments that generate wealth when opportunities arise. Hence, before owning a car, Anthony will need to have sufficient savings. To do this, he must analyse his composition of spending. By ensuring a stable income and planning out his expenditure according to needs and urgency, he can increase savings. Spending for food and shelter should not be compromised but items such as a pair of designer shoes should be forgone.
Secondly, Anthony needs to consider the type and the need for the car. After all, the value of cars depreciates exponentially with time, unlike real estates. Before purchasing his car, he will have to understand his money would not be productively spent if the car is not efficiently utilized. Hence, he should decide on the type of car according to his needs, and the way he plans to use it, or risk wastage.
Alternatives include Weekend cars and car rentals. In Singapore, the owner of a weekend car enjoys a $17,000 rebate offset against the quota premium and the Additional Registration Fee along with other incentives. This can definitely lessen the debt of Anthony if he does not use the car frequently. Alternatively, car rentals are available. For short term car usages, he can consider renting a car at 1500 dollars per month. This allows room for savings since the need for car usage is low.
However if he is sure that he needs a car and is able to support it, he needs to understand the loans available that includes – secured loans, unsecured loans, overdraft and buying on credit. For Anthony, an overdraft is ruled out due to his low savings and hence income instability. Furthermore, a car requires a Certificate of Entitlement and other tax payments to go along with it. Therefore Anthony needs a huge loan. In his case, secured loan would be the best option. Secured loans have the lowest interest rates. It would be a good investment over the long run, since it takes at least 10 years for Anthony to repay his debt. This, of course, comes with the risk that the debtor must be credit-worthy and pay on time. If his not, it will incur a larger burden on him.
As such, Anthony needs to consider all the factors above before deciding on a new car.
River Valley High School
Huang Peng Fei
Hoo Chee How
Ng Jun Wei
reciprocal1234
June 29, 2011 at 10:41 pm
He has to consider the loan amount, interest rate and monthly instalments,whether the loan amount includes the downpayment for the car (if Anthony has no savings he will need to borrow the full cost of the car, including the COE),whether the interest rate for the car loan is reasonable and also to check if the interest is calculated in terms of compound interest or simple interest.He will have to check how much the monthly instalment/payment is, the proportion of instalment to take-home income.Take-home income = salary – CPF contribution and it is not healthy if the instalment takes up the bulk of his salary.Since Anthony spends all his salary every month, it means he has no spare cash to pay instalments.To afford the monthly instalment, he would have to either reduce spending on other items by firstly breaking down how Anthony spends his monthly salary: proportion of spending on necessity and proportion of spending on luxury items.He will also have to consider whether the monthly spending on various items can be reduced, such that Anthony will have enough money from his salary to pay the car loan instalment, whether he is saving enough money for emergency, medical and retirement purposes, other than insurance and CPF. Anthony will also need to check if he is in debt and requires extra payment every month or is there any other foreseeable monthly payments. Lastly, he has to assess whether is there a need to buy a car, whether is it for practical use or to satisfy materialism.There are also many more affordable substitutes like mrt and buses. He has to assess how getting a car can improve his life e.g. save him time and allow him to make more money using the saved time and convenience
Dunman High School
Jonathan Yong 5C43
Geoffrey Tan 5C43
Low Tian Wei 5C43
dollarsandsense2011
June 30, 2011 at 2:08 am
Since Anthony currently spends all his salary every month, a loan would be necessary if he does not have enough savings that he can withdraw to pay for his car. There are a few factors he has to consider before taking up the loan:
1. What kind of car is he planning to buy? A more expensive car such as a Mercedes would require a larger loan and consequently a longer time to repay his debt. It would be worthy to take into account the number of people that the car would have to accommodate. For example, if Anthony is a family man, an MPV would be a more worthwhile choice.
2. How much savings has he accumulated? It may be possible to cover part of the cost of the car so that he can borrow a smaller loan.
3. How stable is his current income? If his income is not stable, it would be risky to take up a loan as he may not be able to afford the monthly instalments should he become unemployed.
4. How often would he need to use the car? This could help him decide on the type of car plate license he should buy (red or white)
• Depending on his current spending habit, what type of car can he afford? Most likely a basic, affordable car that can fulfil his normal transportation needs as opposed to flashy, luxurious ones
• How much savings has he accumulated? It may be possible to purchase a car with most of his savings if he has been thrifty before his current spending habit of spending all his salary every month
• How urgent does he need a new car? If he can wait, he can accumulate more savings and use them to pay off the car by changing his spending habit instead of taking up a loan
• How big the loan does he need? Ideally, as little as possible to avoid having to pay off high interest charges
• Where is the best loan rate? Must do research and review the lowest loan rates before taking up the loan
• Can he afford maintaining the new car after purchasing it? If he has difficulty affording fuel and maintenance costs, he may need to take a larger loan to pay off those bills other than the bill for buying the car
kgb11
June 30, 2011 at 7:22 am
Anthony is planning to buy a new car. He currently spends all his salary every month. What factors should he consider before taking up a loan?
Anthony utilizes his salary to lead a comfortable lifestyle with reasonable comfort and luxury. He also spends all his income, suggesting that he is still young and single. Factors he should consider before taking up a loan are as follows:
1. How much can he skin off his spending to dump into savings
2. Considering the purpose of the car. What and why does he need it? (Luxury?Convenience? Personal accomplishment?) Is it a need or a want?
3. The nature of the Singaporean car market. (COE prices, car prices, local demand, etc.)
4. The nature of the loan. (Interest rate, period, horizon, probability of reselling the loan after a few years, etc.)
5. Considering future career and life prospects. (Includes his income and monetary demands in the near future)
Firstly, he should examine his reasons for buying a car. If it is for convenience sake, he should examine the possibility of purchasing a second-hand car, which is much cheaper than a new one and still manages to suit his needs. Secondly, he needs to prudently choose a suitable car, taking into consideration fuel consumption rates and maintenance requirements. Furthermore, there are other expenditures arising from car ownership, such as insurance policies, road taxes and petrol costs. Seeing that he currently spends all his salary, he will have to be prepared to give up on certain luxuries in order to free up the required amounts.
To buy his car, he needs to make a down-payment and then finish paying off the rest via monthly instalments. It is preferential if the down-payment could be maximized as this minimizes the amount loaned, and thus the interest incurred on the loan. Depending on how urgently he needs the car, it would be in his best interest to accumulate some money first for use in making the down-payment. He would then need to look around for the best loan terms before taking up a car loan.
When taking a loan, lower interest rates are preferable, but other options such as refinancing or loans that lower interest rates when certain criteria have been fulfilled should be taken into consideration as well. Another important factor to take note of is how soon he wants to finish paying off the loan, which will affect the total amount of interest he has to pay and the amount that has to be set aside every month to pay off the car loan. Of course, the best option would be to spend an extended period of time saving up and paying off the car in full instead of taking up a loan.
Anthony is young and will probably face promotions in the future. These increments would help to alleviate his monthly car instalments. However over time, other monetary demands such as marriage, family and housing will also have to be met. Therefore, he needs to more efficiently balance his financial commitments in order to ensure that enough can be set aside every month to pay off his loan.
Word count: 498
Submitted by:
Goh Yeow Chong
Qu Tianlu
Tan Xin Zhong Timothy
NUS High School
Serendipitous CRAPulence
June 30, 2011 at 4:56 pm
Even though Anthony is currently spending all his monthly salary, in order to initiate plans to buy a new car, we must assume that Anthony is currently living comfortably well-off and spending beyond his means. He is also probably confident to refinance his loans by cutting his expenses or getting higher income to own his dream car. Unfortunately, he does not have any savings or investments, consumer bureaus know very little about him and gives him a poor credit report as he does not have much credit in his account. All these conditions mean that secured loans – the more common hire purchase – is his main option left. Then comes another problem: is his dream car a rectangular, toy car-looking Proton Saga or a fancy red colour Ferrari Enzo?
We’ll start with the Proton Saga scenario. Good for Anthony, Proton Saga costs less than $55000 excluding COE, so the transaction will be governed by the Hire-Purchase Act. This allows him to get the loan without minimum deposit requirements – he has no savings to pay. Jubilated, he then decides on the amount wants to loan based on his income and goes on to search for the loans that he qualifies and provide such option.
Next, Anthony needs to consider the interest payable by the effective interest rate (EIR), the loan period and the method of interest calculation used. He can choose between different interest rates computations such as flat-rate basis or monthly rest. Flat-rate basis gives him certainty over the amount he needs to pay without concerns on the rising inflation, but monthly rest will benefit him if the lender decides to lower the interest rate in view of economic conditions. Anthony then needs to find the EIR that he prefers, usually the lowest. Nevertheless, cautious Anthony went on to research on the reputation of financial institutions through their credit ratings and reviews before he decides. Meanwhile, the loan period that he decides would affect the EIR as the longer the loan period is, the lower is the EIR. Finally, it is essential that Anthony ensures that the monthly installments payable are less than 35% of his salary or his budget range to pay punctually as a default might cost him his dream Proton Saga and penalties.
An optimistic person, Anthony believes that he might be able to make an early settlement for the loan after calculating the total amount payable with interest rebate based on the Rule of 78. Before concluding, he did an in depth research on whether there are any penalties for early settlement and hidden costs (extra costs incurred) that he might have missed.
Now let’s visit the second scenario: Ferrari Enzo. The case is highly similar except the fact that Anthony will need to pay a lot more interest assuming he pays mostly through loan. He would want to consider the opportunity cost of taking such heavy or length loans for an asset that constantly depreciates in value.
ACJC – The AConomists
Reuben Loh
Goh Kang Shiong
Lee Ji En
nefmq2011teamapex
June 30, 2011 at 5:07 pm
Firstly, Anthony should consider the necessity of his purchase. This is all the more pertinent considering Anthony’s lack of healthy savings and hopes of taking up a loan. Anthony may not really need a car since viable alternatives are readily available in Singapore, in the form of a well-connected public transport system.
If Anthony is dead-set on getting a car, the next key factor to consider is his current consumption pattern. Financing the car-loan will be a passive expense to him for years to come, so he must ensure he is subsequently able to reduce his monthly expenses. The amount he can free up will also determine the minimum loan period. Moreover, he should determine whether his purchase might compromise other financial goals, for instance the possibility of marriage or buying property in the near future.
Different types of loan repayment plans are also available for Anthony’s consideration, such as fixed repayment and monthly rest schemes. The former’s advantage lies in financial stability, as Anthony is charged the same rate monthly, regardless of prevailing interest rates; while the latter ensures lower interest rates after each repayment based on the remaining principle amount, and will be less of a burden towards the end of the loan period, although this is subject to fluctuations in prevailing interest rates. Also, he may also find it helpful to calculate the effective interest rate of his loan.
Anthony should also consider the lock-in period and the penalty charges for premature repayment of the loan should he be able to do so in future. This is an important factor since his salary may increase in future and he could potentially save on the interest rate. The penalty must be low enough to allow him to repay early with decent amount of gains. Furthermore, this is important when considering refinancing options during the loan period as his financial situation changes, perhaps to reduce the monthly repayments or to switch to different repayment types,etc.
Car prices are naturally another area of concern. This depends on Anthony’s choice of car and current COE prices. Given Anthony’s limited savings, he should patiently shop around instead of buying on impulse, and select one that fits both his needs and budget. Although COE prices cannot be predicted, there are trends and periods whereby the demand for COE isn’t as large and prices are lower. By keeping an eye on COE prices and government policies, he could save a significant amount on COE should he not need the car urgently. The off-peak car scheme is also an attractive alternative if he doesn’t require the car on most weekdays. He will receive an upfront rebate of $17,000 on his COE, and $500 on the road tax yearly. With this, he can enjoy the benefits of car ownership, and yet save a tidy sum for other uses.
In conclusion, the key considerations in order of priority are necessity for the car, mode of repayment and the various clauses of the purchase-hire agreement. Good luck Anthony!
Raffles Institution
Jack Tan Jie Ze
Amos Leow Jian Hui
Christopher Teow Kang Jun
The AConomists
June 30, 2011 at 11:26 pm
Even though Anthony is currently spending all his monthly salary, in order to sanely initiate plans to buy a new car, we assume that Anthony is currently living comfortably well-off, but not a multi-billionaire. He is probably confident to refinance his loans by cutting his expenses or getting higher income to own his dream car. Unfortunately, he does not have any savings or investments, consumer bureaus know very little about him and gives him a poor credit report as he does not have much credit in his account. All these conditions mean that secured loans – the more common hire purchase – is his main option left. Then comes another problem: is his dream car a rectangular, toy car-looking Proton Saga or a fancy red colour Ferrari Enzo?
We’ll start with the Proton Saga scenario. Good for Anthony, Proton Saga after the Hire-Purchase Act was amended in 2004, he can now get the loan without minimum deposit requirements – he has no savings to pay. Jubilated, he then decides on the amount wants to loan based on his income and goes on to search for the loans that he qualifies and provide such option.
Next, Anthony needs to consider the interest payable by the effective interest rate (EIR), the loan period and the method of interest calculation used. He can choose between different interest rates computations such as flat-rate basis or monthly rest. Flat-rate basis gives him certainty over the amount he needs to pay without concerns on the rising inflation, but monthly rest will benefit him if the lender decides to lower the interest rate in view of economic conditions. Anthony then needs to find the EIR that he prefers, usually the lowest. Nevertheless, cautious Anthony went on to research on the reputation of financial institutions through their credit ratings and reviews before he decides. Meanwhile, the loan period that he decides would affect the EIR as the longer the loan period is, the lower is the EIR. Finally, it is essential that Anthony ensures that the monthly installments payable are less than 35% of his salary or his budget range to pay punctually as a default might cost him his dream Proton Saga and penalties.
An optimistic person, Anthony believes that he might be able to make an early settlement for the loan after calculating the total amount payable with interest rebate based on the Rule of 78. Before concluding, he did an in depth research on whether there are any penalties for early settlement and hidden costs (extra costs incurred) that he might have missed.
Now let’s visit the second scenario: Ferrari Enzo. The case is highly similar except the fact that Anthony will need to pay much (much) more interest assuming he pays mostly through loans. He would want to consider the opportunity cost of taking such heavy or length loans for an asset that constantly depreciates in value.
Otherwise, “vrrroom vrooommmm!” there he goes!
ACJC – The AConomists
Reuben Loh
Goh Kang Shiong
Lee Ji En