Car Financing Costs will Haunt You

New car prices in Pakistan have gone past the level of sanity with prices being revised after a frequent interval of less than 3 months reflecting a huge disproportion in forex fluctuations versus the impact on per unit price for end users.

Honda Civic and Toyota Corolla which are known as ordinary cars for middle-class buyers around the world are reaching PKR 5 million to up to PKR 6.5 million whereas the flurry of expensive crossovers is well beyond that. Most of the new cars have already become more expensive than residential property and it just doesn’t make sense to spend such a huge amount of money only to buy a “car” which lacks quality & features when compared to the ones sold in other markets.

Related: Car Sales to Slow Down Due to Auto Financing Restrictions

A lot of people believe in these tougher economic times, car financing is the key to buying new cars. Yes, it certainly used to be this way, however with the sort of price tag new “locally assembled” cars currently bear, the estimated monthly installments (EMI) will be enough to boggle your mind. Keep in mind there were amendments made by the State Bank last year in the prudential regulations for auto financing, as per which:

• The minimum required down payment has been increased from 15% to 30%.
• The maximum tenure of auto financing has been reduced from 7 years to 5 years.
• The maxi­mum debt-burden ratio, allowed to a borrower, has been decreased from 50 to 40%.
• Auto financing limits availed by one person from all banks in aggregate, will not exceed Rs 30 lac at any point in time.
• Financing for imported vehicles has been completely prohibited regardless of engine capacity.

Based on the above, suppose someone is willing to buy a new Honda Civic RS via car financing, the minimum we would need to pay in terms of a 30% down payment will be PKR 19.5 lac and then will come the hefty monthly installments. In order to show you how tough the EMIs are, we have compiled below, a list of different locally assembled cars to reflect their EMI against a 30% down payment and a 5-years (60 months) payback period. Do note that the below-mentioned rates will vary depending on the bank you opt for & the markup applied. Have a look:

The above table only shows the down payment and estimated monthly installments. Other costs such as registration, insurance, taxes, bank fees & processing charges, and of course the premium/ on-money will have to be added to the final cost a user will have to bear in order to bring a new car on the road.

Related: Buying a New Car isn’t Anyone’s Piece of Cake

Looking at the above figures, its hard to evaluate how a common man, say a salaried person, will be able to bear these costs and with such hefty EMIs, how can one be able to bear other costs including fuel & maintenance of the vehicle, not to mention the obvious expenses (education/ food/ healthcare, etc) and to feed the family within a specific monthly income.

Another interesting thing is the 4th clause of the SBP regulations (Auto financing limits availed by 1 person from all banks in aggregate, will not exceed Rs 30 lac at any point in time). By looking at the prices, most of the vehicles listed above require more than Rs 30 lac financing based on a 30% downpayment, thus making them unable to get processed unless the purchaser increases the downpayment in order to bring the financing limit within the mentioned cap.

Related: New Cars Sales: Booked vs Delivered

Simply put, a person cannot take a car loan of more than Rs 3 million. Lastly, the maxi­mum debt-burden ratio has also decreased from 50 to 40%. This means if a person earns Rs 100,000 a month, then he will be eligible for a monthly installment of a maximum of Rs 40,000. Now see the table again and do the math, how much you need to earn if you wish to purchase an ordinary Toyota Corolla via bank financing?

To sum it up, the above scenario brings two situations in front of us, first is the widening economic divide. In simple words, the rich are getting richer, while the poor becoming poorer. Second once again shows the presence of scalpers in the market, since the above calculations render that even a person with a handsome salary is not able to buy most new cars via financing, so who is buying these cars after all? Since sales shown are in fact just “booked” units & not deliveries, the number of new car registrations will perhaps show how much of these new cars are actually going into the hands of genuine buyers.

UsmanAnsari

A computer animation professional with over 23 years of industry experience having served in leading organizations, TV channels & production facilities in Pakistan. An avid car enthusiast and petrolhead with an affection to deliver quality content to help shape opinions. Formerly written for PakWheels as well as major publications including Dawn. Founder of CarSpiritPK.com