Car buyers now prefer to pay cash

Mansi Kapur / TNN / May 25, 2007, 01:25 IST

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Over the last five months, the number of cars purchased using cash as against loans has shot up 10%.

MUMBAI: If you thought rising interest rates are stopping people from buying new cars, you thought wrong. 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, the number of cars bought using the finance route have been declining. Data for May show that only 75% of cars are financed.
Banking and finance experts attribute this to the increase in interest rates. "Borrowing money for the customer has become expensive by around 3-3.5% because of interest rate hikes. This has had two effects, either the customer who can afford it, pays upfront or he simply postpones the purchase," a senior banking official said.
Sales in the passenger car segment clocked a cumulative growth of around 15% in the first four months of 2007. Analysts say 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 in the industry point out that they're comfortable with the numbers. If, however, 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 and any slowdown in offtake could translate into oversupply and leave manufacturers with unsold stocks.
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.

'By middle of next month, 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," an analyst said.
One of the reasons why automobile companies are thinking up incentives is fear of the future. "About 90% of car buyers who opt for finance are already 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 utlilised as EMI for a car," a finance expert said.
Add to this the fact that banks are 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 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% compared with other places. As a result, people are having to pay upfront," an industry source said.

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