Now might be the best time to auto loan
The cost of financing your car is down 50% and the rates you will get now are the lowest in two years. This is because the central bank has reduced its benchmark interest rate to 7%, the lowest since July 2018.
The State Bank of Pakistan’s monetary policy rate, the rate at which commercial banks borrow from the former’s discount window, affects almost every interest rate in the market. When the SBP changes its policy rate, the rates offered by banks move in tandem.
Following a nationwide lockdown, which sent the economy into its first contraction in 68 years earlier this year, the central bank slashed its policy rate by more than 6% to its present level. This made borrowing cheaper and brought the cost of auto financing to the lowest level in two years.
The Karachi Inter-Bank Offered Rate (KIBOR), the rate at which banks lend money to each other, determines the interest rate at which you can avail a bank loan to finance your car. The KIBOR, which is always slightly higher than the SBP’s policy rate, is hovering at 7.57% at the moment.
When a bank finances your car, it charges you the KIBOR plus a fixed percentage (bank’s profit) on the amount you borrow.
A market survey by SAMAA Money indicates that one of Pakistan’s largest commercial banks is charging 4% above the KIBOR, taking the cost of your loan to 11.57%. This is nearly half of what it would cost to finance your car in 2019 when the KIBOR was 14% and the final rate (the one offered to customers) was between 18% and 21%.
When you take an auto loan, you have the option to pay 15% to 70% of the car price from your own pocket, the remainder can be financed through borrowed money. The higher the down-payment (your own money), the lower the installment you pay every month. You can also choose from monthly installment period of one year to a maximum of seven years.
For example, if you opt for a 1000cc car that is priced at Rs2 million and pay 30% or Rs600,000 from your own pocket, you will need financing for the remaining Rs1.4 million. If you choose the five-year plan, you have to pay Rs31,000 every month for five years. The installment will be higher if you opt for insurance.
You will eventually pay Rs1.86 million (or Rs1.99 million if insurance is included) to the bank instead of Rs1.4 million–the amount exceeding the money you borrowed is the bank’s profit margin. However, this monthly installment may vary every year subject to changes in the KIBOR.
For example, when you sign the agreement, your installment amount is locked for one year based on the prevailing rates and is revised next year (before the 13th instalment for example) according to changes in the KIBOR, which depends on the SBP’s policy rate.
Revised every two months, the monetary policy rate is a tool central banks use to control inflation. By raising rates, they make borrowing expensive, which ultimately slows down spending and brings prices under control. In the last monetary policy, the central bank didn’t change its policy rate because of the high inflation rate.
Inflation is likely to remain in the range of 9% to 10% this fiscal year, which ends in June 2021.
Islamic banks offer Ijarah, a shariah-compliant version of the conventional car leasing. Ijarah offers a few more services along with car financing that a buyer must consent to since it is compulsory to make the transaction shariah compliant.
According to a large Islamic bank, if you opt for Ijarah for a Rs2 million car with a 30% down-payment and avail financing for the remaining Rs1.4 million, you will be paying Rs37,500 in monthly installments.
It will add up to Rs2.25 million in case of a five-year plan and the amount in excess of the money you borrowed is the bank’s profit margin. Unlike conventional banks, these installments will remain unchanged till the end of your financing plan and the bank will take full responsibility for damages to the automobile during that period.
It charges installments as rentals and after five years, the bank will gift (transfer ownership of) the car to the buyer.