Cheaper car loans fail to improve automobile sales

2nd July 2015

 
 

Despite Pakistan’s interest rate touching a 42-year low, the cheaper car loans have yet to create a boost in the country’s automobile sales. Although car loans are now available from as low as 9 percent per annum, this has failed to convert consumers to bank financing.

Ali Asghar Jamali, Chief Operating Officer of Indus Motors, believes that car loans presently comprise of 30 percent of new vehicle purchases. Although this figure is 8 percent higher than last year, it is considerably lower than the 2004-07 eras; such was a time when 75 percent of all new vehicles and automobiles were bought through car loans in Pakistan.

The biggest hindrance still remains the extensive documentation and stringent conditions imposed by the banking sector on new loans. Consumers prefer to buy vehicles on cash and reduce the hassle of down-payments and monthly installments. Despite cheap financing options, the consumer mindset is still averse to car loans in Pakistan.

Studying the differing views on the poor performance of car loans, MyBankersOnline is presenting its analysis:

  1. The aversion to car loans stems from exorbitant markup rates in the past; consumers have struggled to make complete payments and have often ended up defaulting on car loans and getting their vehicles seized by the banking sector.
  2. Car prices are also exorbitant in Pakistan; the value provided by local assemblers does not match the cost of the vehicle itself. Consumers feel that they can spend lower amounts for used vehicles – they prefer buying used vehicles on cash.
  3. Banks are not aggressively marketing their car loans in Pakistan’s economy. They prefer parking excess liquidity in government securities instead of lending to the consumer segment. This adversely affects demand for car loans in the country.

Statistics show that there are only 16 vehicles per every 1,000 persons in Pakistan – the lowest rate in the Asian region. The ability to purchase new vehicles only resides with a nominal percentage of the country’s population. The banking sector needs to loosen their credit policies and actively promote car loans to help in improving this ratio. The consumer mindset also needs to shift from aversion to car loans to further assist in boosting automobile sales in the country. The current interest rate in the economy is ideal for creating higher consumer demand – willingness from the consumer and ready availability of car loans by the banking sector will create the necessary difference.

 

 
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