Saw an ad for your dream motorcycle at an impossibly low downpayment? Before you sign on the dotted line, get a clear picture on the in-house financing process behind these sweet deals. As this author has as much money-smarts as the average potato, we milked some proper insights from fellow biker Daniel Teng, a financial consultant of 14 years. He breaks it down in plain speak:
How do these loans work?
Hire purchase finance packages are also known by many names here in Singapore: instalment plan, “COI” aka “Carry On Instalment”, motodiam loans, in-house financing, “momma gonna kill you” and so on. They allow cash-strapped buyers to spread out the cost of a new motorcycle over a longer period of time, by essentially hiring it at a monthly rent. The caveat? Interest fees.
Take the hire purchase package below as an example, which is based on an actual in-house loan offering:
Terms & conditions:
- Minimum financed amount: 6,000 SGD.
- Admin fee of 500 SGD will be imposed for loans below 20,000 SGD.
- Minimum financed tenure: 12 months.
- Early termination: 1.5% original loan amount for the first 2 years.
- Conditions:
– Approval advice is only valid for 30 days, after which the application has to be re-evaluated.
– 6 and 7 years loans are only applicable for Class 2 new motorcycles, with minimum financed amount 20,000 SGD.
– Not applicable for COE renewed motorcycles.
– No commission payable for direct buyer and seller application.
Let’s say your dream starter motorcycle costs 16,000 SGD on-the-road, including machine price and COE. If you go with the 5 year loan, with an advertised interest rate of 4.5%, these would be the key numbers to crunch:
Downpayment (10%): 1,600 SGD
Loan amount before interest (90%): 14,440 SGD
Total interest from a 5 year loan: 4.5% x 5 = 22.5% = 3,249 SGD
Loan amount with interest: 17,689 SGD
Monthly payment for 5 years: 295 SGD
Actual amount paid for the motorcycle: 19,289 SGD!
What are the pitfalls?
So after a year with your 19,289 SGD dream motorcycle, you decide to upgrade to 400cc to complement your newly-minted 2A license. A one-year rental fee of 2,000 SGD sounds reasonable, so you advertise the bike for sale at 17,289 SGD.
But don’t forget – that motorcycle costs 16,000 SGD brand new (assuming COE remains constant), so who would buy a used one for 17,289 SGD? You end up selling the bike at 12,000 SGD to account for depreciation in a competitive marketplace.
This means that for one year of ownership, you suffered a loss of 7,289 SGD. Now momma really gonna kill you.Â
Now, what if you decide to pay up the loan in full, ahead of schedule? You’ll still be subject to early settlement fees which could be as high as 2,000 SGD, regardless of the remaining loan tenure and principal sum. Read the fine print!
Who owns the motorcycle?
Not you, yet. Under a hire purchase agreement, the financier – in this case, the bike shop – owns the motorcycle until you’ve paid for it in full. Most bike shops will keep a spare key to the motorcycle, and repossess it if you run into financial troubles.
“Advertised interest” vs “effective interest”
You see, many motorcycle dealerships lure buyers with affordable monthly payments, but fail to educate them on how the loan interest can really inflate the cost.
You might think that an interest rate of 4.5% is reasonable, since you could simply take up investments or saving plans to recoup the loss. But don’t forget – the advertised interest rate is not the same as the effective interest rate, which takes into account the effects of compounding over the loan period.
DBS Bank offers a nifty instalment calculator tool on their website that shows this clearly:
As you can see, the effective interest rate on a 5 year loan is above 8% – nearly double the advertised rate of 4.5%!
Tips for a financially savvy purchase
1) If you don’t plan on keeping the motorcycle for long (as in the case of most 2B and 2A bikes), it’s better to buy used. The first owner always takes the biggest hit in depreciation, the instant the bike rolls out of the showroom. Hunt for pre-loved deals that have been owned for a few months or a year.
2) Pay full cash if you can afford it, or opt for the shortest loan duration if you must.
3) Shop around for loans with the lowest interest rates. Remember that the advertised interest rate for hire purchase is not equal to the effective interest that you actually pay. Consider taking a bank loan instead of an in-house loan from the bike shop, in order to avoid inflated interest rates and hidden mark-ups.
4) Consider the concept of relative interest. If you have 16,000 SGD sitting in an investment account that is projected to earn 7% interest, you might want to use that sum to pay off your motorcycle instead. It’s more sensible to forsake the non-guaranteed 7% earnings, in order to avoid the definite loss of the loan interest amount.
5) Beware of “zero dollar ride-away” deals. Bike shops may completely waive the downpayment, but inflate the overall selling price. You’ll end up paying higher monthly instalments and a larger amount of loan interest.
Consider yourself enlightened. Seeking more friendly financial advice so you can Buy, not Cry? Connect with Daniel at +65 9232 4815. No strings attached.
But don’t forget – that motorcycle costs 16,000 SGD brand new (assuming COE remains constant), so who would buy a used one for 17,289 SGD? You end up selling the bike at 12,000 SGD to account for depreciation in a competitive marketplace.
I have faith COE will rise XD