Hit the brakes, sir. Is that cash or credit for the car?

Dear Sven,

I’m American and my wife is Vietnamese. We’ve decided to buy a car. I’ve never purchased a new one in Asia. We definitely want to buy new. We’re considering getting a loan from a bank. Which banks would be able to offer me an auto loan, and would I be issued the loan in my own name or would it have to be in my wife’s name? Are there any other issues that I would encounter?

Firstly, kudos to you for actually making the frightening leap to drive a car around Ho Chi Minh City. I would be too scared of hitting a crazy motorist or a jaywalking pedestrian while on a dreary drive to work one morning.

You can take comfort that multiple free-trade agreements, which Vietnam will be a party to, will reduce the cost of vehicles quite substantially through the reduction of import duties in the next few years. According to Tuoi Tre News, the prices on small imported cars (engine capacity smaller than one liter) may drop by 42 percent. It seems this will only come into effect after June 2016, so if you can be patient you might land yourself a good deal.

Commonwealth Bank will issue you a car loan for 80 percent of the purchase value, over a four-year term. To obtain a loan you will have to present a work permit or residence card as well as documented proof of your income. They are not able to issue you a loan in your own name, so you would have to make a joint application with your wife, or simplify the process completely and have the application done in your wife’s name. You will have to purchase insurance on the vehicle, which the bank might facilitate, or it could be done through our insurance division which works with multiple providers. You can choose from the following interest rate structures: 1) 6.99 percent per annum, fixed for six months which would return to 8.49 percent per annum after six months, 2) 7.49 percent per annum fixed for one year which would return to 8.99 percent after the initial fixed period. They would charge a one percent fee for early repayment in the first year and 0.5 percent for early payment in the second and third year.

Standard Chartered would be able to issue you a loan in your own name, but instead of a specific auto loan structure as provided by Commonwealth, they would issue the loan to you as a personal loan, which is basically a loan issued to you for general purchases and consumption. From the bank’s perspective this would obviously be more of a risky type of loan and they would require evidence of who your employer is, concrete earnings proof (three months of bank statements). Additionally you would be subject to higher interest rates (17 percent – 22 percent per year). There is no fixed period or early penalty structure as offered by Commonwealth, thus you would be foregoing a lower interest rate for a more flexible loan structure.

The first issue would be obtaining insurance on your vehicle as a financial institution would most likely not issue a loan on a vehicle which is not insured. If it is a new vehicle this would not be too difficult. The second and most important issue is that you are buying a depreciable consumer good on credit at relatively high interest rates. You should perhaps only consider obtaining loans against assets which are intended to produce future profits, for example, investment property. A vehicle depreciates in value the second you drive it out of the showroom, and will only continue to depreciate in value until the day you scrap it. Generally, getting involved with consumer credit is not a good idea considering the high interest rates you are subject to, and the fact that over time you will be paying considerably more for something that you realize you didn’t really need.

BIO: Sven Roering is a Managing Partner at Tenzing Pacific Investment Management. He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam.