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Few takers among car buyers for balloon payment loan scheme
THE first major bank to re-introduce the so-called balloon payment car loan scheme is trying to get it to float, while leasing deals seem to be drawing car buyers trying to sidestep vehicle financing restrictions.
The balloon scheme first made the news nearly 20 years ago when Citibank launched it with BMW distributor Performance Motors. It made a return recently when financial institutions such as Century Tokyo Leasing began offering it in the wake of the Monetary Authority of Singapore's February 2013 loan curbs.
Just over a month ago, UOB became the first major bank to fly the balloon with its UOB HP50 plan.
Like a conventional hire purchase (HP) scheme, the maximum loan quantum is capped at 50 or 60 per cent of the car price, depending on the car's OMV or open market value, repayable over the same maximum five-year tenure.
But unlike the usual HP loan, the monthly instalment is only about half the usual amount.
The catch is the higher interest rate and that the final instalment after four years and 11 months is a hefty lump sum, hence the term balloon payment.
Dennis Khoo, head of personal financial services for Singapore at UOB, said that aside from traditional car loans in the market today, the UOB HP50 is "a new and innovative option that offers customers greater financial flexibility while paying for their car".
He said: "The UOB HP50 is designed to cater to car owners who want to have better control of their cash flow over the mandated five-year repayment period. At the end of the repayment period, it also offers the flexibility of being able to trade in their car at the same car dealership or redeem the loan with UOB."
Take a S$100,000 car with a maximum loan possible of S$60,000 over five years, or 60 months, for example. A normal HP with a flat interest rate of 2.78 per cent results in a monthly instalment of S$1,139.
With UOB's balloon scheme, the interest rate is 3.5 per cent but the monthly instalment for the first 59 months is only S$598, or just 53 per cent of the normal HP's instalment. However, for the 60th month, the final instalment is S$35,128.
One prospective customer who decided not to opt for the balloon scheme says that he did not want to have to "fork out a huge amount at the end of the day".
"Yet, it is no different from other loans because the downpayment is the same," said Henry Lim, who is eyeing a new Mitsubishi.
According to a sales manager, the cash downpayment is the main problem for many car buyers. "Most people can afford the monthly instalments," he said.
Nevertheless, he is persuading customers to look at the scheme as an alternative to the traditional loan. "Perhaps they can use their cash to first meet the downpayment requirement, then take it easy with lower monthly repayments. But so far, we've only had a few takers."
Vincent Tan, managing director of parallel importer VinCar, also said that the balloon scheme has not taken off because it still requires half of the car price in cash.
He says: "If a buyer can come up with that, he may as well take a normal loan. After paying half of the car price, the loan amount won't be that much and the instalments should be manageable."
According to UOB though, the downpayment should not be a problem because "Singapore car owners today are a prudent lot" with sufficient savings or spare cash. "Even at the five-year mark when the car loan is up for redemption or if the owner wishes to trade it in, the car will still be worth more than the outstanding loan as the 50 per cent downpayment and five years' worth of instalments have already been paid," added Mr Khoo.
UOB data shows that Singapore car owners usually hold on to their cars for an average of four-and-a-half years to five years.
Still, some buyers who want to get around the 50 per cent cash downpayment are opting for leasing schemes instead, said VinCar's Mr Tan. "The take-up rate for leasing has been good because the downpayment is only 20 per cent and the repayment is over seven years," he added.
Mr Tan said that there are a few lenders that offer leasing packages, with one of the more successful being Hitachi Capital. "At the end of seven years, the lessee can either return the car to Hitachi or buy it back at market rates," he explained.
The drawback though is a much higher interest rate of 4.52 per cent.