Buying cars- Preference for full payment

Rising interest rates are not stopping people from buying new cars. Consider this: Over the last five months, the number of cars purchased using cash as against loans has shot up 10%.

Until now, about 85% of new cars sold in India were financed by Bank loans. Easy availability of auto loans has been one of the variables driving car sales in the country. But beginning January 2007 the number of cars bought using the finance route has been declining. Data for May 2007 show that only 75% of cars are financed that is a decrease of 10% compared to beginning of the year of purchasing cars on loans.

Banking and finance experts attribute this to the increase interest rates. Borrowing money for the customer has become expensive by around 3-3.5% points because of interest rate hikes. This has had two effects – the customer who can afford it pays upfront, or postpones the purchase.

Sales in the passenger car segment clocked a cumulative growth of around 15% in the first four months of 2007. Industry analysts say that this growth could have been closer to 20% in a situation where interest rates were lower. But that isn’t much reason for concern yet. Experts say they’re comfortable with the numbers. Growth in sales fall to anything below 10%, they would panic. This is because all auto companies are in the process of increasing manufacturing capacities in the country and any slowdown in off-take could translate into oversupply and leave manufacturers with unsold stock.

Little wonder then that auto manufacturers have stepped in with marketing incentives aimed at keeping growth on its current trajectory. While some have already announced discounts and offers, which offset the increase in interest rates, others are working out their strategy. In a couple of months, a lot of action is expected from car companies in the form of advertisements and consumer benefit schemes. Car companies are working in tandem with dealers to come up with a basket of incentives to keep the demand momentum going.

One of the reasons why auto firms are thinking up incentives is fear of the future. About 90% of car buyers who opt for finance are paying EMIs on home loans and personal loans. With interest rates going up, the monthly outgo on these debts has gone up too. Therefore, there is less left every month, which could have otherwise been utilized as EMI for a car.

Add to this the fact that banks are increasingly reluctant to fund car purchases. While bank officials deny this, market sources said banks haven’t been as aggressive as they usually are when pushing car loans. There has been a considerable rise in default rates on auto loans, especially on two-wheelers and a lot of banks are pulling out in certain regions where default rates are higher by about 3-4%. This is also encouraging people to buy upfront and grab all incentives the manufacturers are doling out for cars.