Car Financing Decreases for the 23rd Month Running

Jawad

24 Jun 2024

212

Car Financing Decreases for the 23rd Month Running

For nearly two years, the auto financing sector has experienced a persistent decline. This downward trend began in earnest as the nation's economy struggled with diminishing foreign reserves and the devaluation of the rupee. Despite efforts to stabilize the market, the car financing sector remains in a slump, illustrating the broader economic challenges facing the country.

Persistent Decline in Car Financing

As of May 2024, the car financing industry has been in decline for 23 consecutive months, with the total financing dropping to Rs. 233 billion. This marks a 22.5% decrease compared to May 2023 and a 1.2% fall from April 2024. The latest data from the State Bank of Pakistan (SBP) underscores the continuing challenges, showing a significant reduction from Rs. 300 billion in outstanding auto loans recorded in May 2023.

Notable Decline Over Two Years

The overall decrease in auto financing is even more pronounced when viewed against figures from June 2022, when the total stood at Rs. 368 billion. This represents a substantial reduction of Rs. 135 billion within less than two years. Despite the SBP lowering the interest rate to 20.50% on June 10, down from 22% where it had been for almost a year, this adjustment has not been sufficient to revive demand for new car loans.

Industry Insights on Financing Challenges

Experts in the industry suggest that the prevailing interest rate is still too high to attract potential buyers. High inflation over the past 18 months has severely impacted purchasing power, making it difficult for consumers to afford new vehicle loans. Additionally, anticipated fiscal policies that include higher taxes are expected to further reduce disposable incomes, complicating any potential recovery in the auto financing sector.

Consumer Hesitation and Market Dynamics

Consumer reluctance to buy new vehicles can be linked to several factors: high monthly loan installments, a steep 22% interest rate, increased vehicle prices, and stringent SBP financing regulations. Despite these challenges, private bank financing for used cars, particularly those up to nine years old, has played a crucial role in sustaining the auto financing market in recent years. This segment of the market has been vital in maintaining some level of activity despite the broader downturn.

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