Used Cars Keeping Auto Financing Afloat

For the last two to three years, people have been looking more and more for used cars for auto finance due to the State Bank of Pakistan’s (SBP) prudential regulations and the historically high 22% interest rate. Several banks have dabbled in the financing and leasing of secondhand cars, even up to 9-year-old models. However, because of concerns about affordability, many customers are still turned off by exorbitant monthly installments.

Auto financing has survived because of the availability of used cars on monthly installment plans, according to dealers and financial sources. Otherwise, they claimed, the sharp increase in the cost of new cars and the declining purchasing power of many consumers—which is made worse by rising electricity bills—would have resulted in very little demand for them.

Related: PAMA Says Used Cars Fill the Market Vacated by Locally Assembled Vehicles

Ahmed Shamim, a private banker in charge of auto leasing, stated that sharing information on imported vehicles and their installments has been difficult since the SBP updated prudential regulations in September 2021, which also prohibited financing imported vehicles. He said that used automobiles are currently in great demand as a result of the amended SBP criteria and a financing cap of Rs 3 million on aggregate exposure.

He shared that the price of used 1000cc vehicles from 2015 to 2020 models ranges from Rs 1.6 million to 1.9 million, with monthly installments at around Rs 40,000 to 50,000. The price of a 5-year-old 660cc model would be around Rs 2.1 million and that of an Alto AGS/Auto and 1,000cc around Rs 2.2 million, with monthly installments of approximately Rs 55,000, Shamim added.

Over the last 6 months, the Karachi Interbank Offered Rate (Kibor) has declined from 24.5% to 21.70%, aiding genuine consumers who need financing for either new or used vehicles. Banks have also reduced their profits and their fixed rates, which have proven beneficial. Shamim expressed the hope that Kibor may decline in the future, leading to revised installments.

suzuki used1

He stated that salaried individuals earning between Rs 150,000 and Rs 300,000 per month apply for financing, whereas banks give car financing of up to Rs 3 million (total aggregate exposure) following central bank prudential standards. He also stated that the Suzuki Alto 660cc, both new and used, is now in strong demand for leasing and financing by banks.

Shamim said there might be some chances of a cut in the interest rate in the future. However, he stressed the need for revising prudential regulations to extend the financing cap from Rs 3 million to at least Rs 9 million minimum to enhance exposure for an individual in auto financing.

Related: Used Cars That Held Their Value for Over 25 Years

As per prudential regulations, vehicles with less than 1,000cc (locally assembled) could be financed with a minimum 30% equity instead of 15%, while the tenure has also been revised to 5 years from 7 years max. For vehicles above 1,000cc, the tenure is 3 years instead of 7 years max. These changes in tenure and the cap on the aggregate debt burden ratio have posed challenges for buyers.

Auto financing has consequently plunged for the 21st month ending March 2024 to Rs 239 billion, down by 1.4% or Rs 3.5 billion month-on-month. According to data issued by the SBP, the total decline in the past 21 months stood at Rs 128 billion, from Rs 368 billion at the end of June 2022.

An authorized dealer of locally assembled vehicles confirmed that only second-hand vehicles are being financed while financing requests from consumers for new vehicles have been negligible due to extremely high prices and a 22% interest rate. “My showroom finances one to three new locally assembled vehicles every month,” he said, citing high power, gas, and food bills as forcing consumers to first manage the amount for these necessities before looking for other requirements.

Relayed: Should We Begin Importing Second-Hand Cars from India?

Currently, corporate buying accounts for over 60% of the sale of new cars and other vehicles, with the rest of the share going to individual cash buying. The dealer said as inflation shows signs of slowing down in the coming months, stagnant consumer income continues to hinder the purchase of new cars.

Mashood Ali Khan, a local auto part maker and exporter, believed that only a single-digit interest rate can revive auto financing in new vehicles. He urges the government to lower taxes and duties on locally produced vehicles in the upcoming budget to help reduce prices and revive dwindling sales.

Source: Dawn

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