Concerns over 100 per cent borrowing for vehicles as outstanding car loans hit 12-year high

Under MAS rules, financial institutions like banks must cap the loan amount given out at between 60 per cent and 70 per cent of the purchase price, depending on the vehicle’s open market value.

To check if full loans are being offered by car dealers with little restriction, ST posed as a would-be buyer of vehicles to investigate the prevalence of such options.

Of the five new and used car dealers ST reached out to, only one advised caution and encouraged prudence.

The rest said they could offer 100 per cent loans, either through in-house financing or by inflating the selling price. None of the authorised dealers, which tap financial institutions for loans, contacted by ST offered such borrowing schemes.

ST visited three companies on Feb 10 to inquire about the purchase of a new small car.

Two dealers immediately confirmed what their ads said – that they would submit a loan application to their in-house financers or partners for a loan covering the full cost of the car, which amounted to around $178,000 with certificate of entitlement.

One dealer said that for a car of that value, the buyer would be looking at a 10-year loan of around $2,000 in monthly instalments. Based on ST’s calculations, the total amount paid over the 10 years would be $240,000.

Buyers would need to show proof of a monthly income of at least $6,000.

The second dealer said a 100 per cent loan would be taken from the firm’s in-house financing unit.

The third dealer said that while it was possible to apply for a full loan for the car purchase, it would be more advisable to pay a 10 per cent down payment at least.

The dealer said this would be more financially prudent for someone earning a monthly income of around $6,000.

However, the dealer added that although it advised against it, it can use a long-held industry practice and inflate the price of the vehicle on paper when submitting the loan application to financial institutions or other loan providers.

“In the eyes of the finance companies, you are actually buying the car at a higher price, not the real price. So that they will loan you the original price amount,” said the dealer.

The buyer will still have to cover the goods and services tax incurred on the difference between the actual and inflated prices.

“(This is done) because we are generating an invoice, we are very law abiding… so we are very careful about compliance but we also try to fulfil our client’s needs,” the dealer added.

Another dealer said it offered the same inflated price scheme, but would absorb the additional GST due to an ongoing promotion.

A third scheme ST learnt about involved buyers claiming they are buying the vehicle to operate a private-hire car (PHC), in order to secure a 100 per cent loan.

PHCs, which are meant for commercial use, are exempted from MAS’ car financing rules.

Experts said the authorities take a serious view of any attempt to circumvent motor-vehicle financing restrictions.

As for PHCs, ST understands that the Government is monitoring possible exploitation of the PHC exemption, where owners register private cars as private-hire cars with no intention of offering the service.

In a reply to ST, MAS sounded a note of caution over 100 per cent LTV loans, saying unregulated financing schemes carry higher risks, such as hidden charges and bigger losses for the borrowers if they default.

Its spokesperson added that the authority is also aware of the inflated-price practice used by some in the car industry.

“To counter mark-up practices, we expect FIs to conduct checks to assess if the purchase price is reasonable, such as by obtaining independent valuations.”

The spokesperson noted that the vast majority of borrowing for motor vehicle loans are taken with financial institutions regulated by the central bank.

“Other than MAS-regulated FIs, entities which are licensed or exempt moneylenders, or which offer financing in the form of hire-purchase arrangements, are also required to comply with the same motor-vehicle financing restrictions under the respective legislation or regulations,” the spokesperson said.

Prof Charoenwong said MAS could require FIs to independently verify car purchase prices by cross-referencing with LTA registration data, market valuation databases, or a standardised price guide, rather than relying solely on dealer-submitted invoices.

He added: “This is analogous to how mortgage lenders commission independent property valuations rather than taking the seller’s word for it. The technology and data exist; what’s needed is the regulatory expectation.”

Prof Charoenwong also said the Government could expand the Hire-Purchase Act or create a new licensing framework to capture lease-to-own and in-house financing arrangements.

“Agencies could mandate standardised disclosure of total borrowing costs, effective interest rates, and key risks for any motor-vehicle financing arrangement, similar to what regulated lenders must provide,” he added.

Prof Charoenwong said some dealers know that the bank’s loan officer has limited ability or incentive to challenge the stated price, especially when the deal superficially complies with LTV requirements.

So if the invoice says $170,000, that is what gets processed, he said.

“The brazenness – openly advertising 100 per cent financing and guaranteed approvals on social media – tells you exactly how dealers perceive the regulatory environment: they don’t fear consequences.

“That perception changes only when enforcement action actually materialises,” said Prof Charoenwong.

Authorised distributors contacted by ST said that they do not offer 100 per cent loans.

However, they do work with finance companies to extend private-hire car loans for ride-hailing drivers, which can be a higher amount than the standard hire-purchase loans for individuals.

The Singapore Vehicle Traders Association declined to comment when asked about the practice of dealers inflating their selling prices to get a higher loan amount for their customers.

Its spokesman said that being able to borrow more will make it easier to get a buyer.

The Hire Purchase, Finance and Leasing Association of Singapore, an industry body which keeps a register of vehicles that are financed by its members, said that it does not monitor the business practices of its members.