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Car finance companies to slash rates by 2% - Views on News from Equitymaster
 
 
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  • Feb 11, 2000

    Car finance companies to slash rates by 2%

    Close on the heels of the interest rate cut on small saving schemes and consequently on housing loans, there is cause for cheer for all those dreaming of buying their own car. A leading financial daily reported today that auto financiers are expected to slash interest rates from the current levels of 1718% to about 15-16%.

    The interest rate war has been sparked off by ICICI, which is now offering car loans at 16%. Taking the lead, Kotak Mahindra Primus and Standard Chartered Bank have announced similar rate cuts and other are expected do the same soon.

    The automobile industry has been seeing better days in recent times. Indian consumers, especially have been clear beneficiaries of the automobile boom. With a new (and better) car to choose from almost every third month, the interest rate cut will further fuel the demand for cars. A broad estimate reveals that monthly instalments will decline from an average of Rs 6,000 to Rs 4,500 per Rs 100,000 making the loans more affordable for the middle class. However, existing borrowers will continue to repay their loans at the earlier rates. However the absence of prepayment charges for auto loans may spark off hectic refinancing activity in the sector.

    The interest rate cut should not affect the margins for auto finance companies as their cost of funds has also declined in line with the reduction in real interest rates. That ICICI has taken the lead in cutting rates comes as no surprise. Though relatively new to consumer finance, the company has displayed an aggressive streak in garnering market share. Industry majors however, are not too happy about this development and have accused ICICI of undercutting the market. It should be noted that not too long ago, housing finance companies came to an agreement with regards to refinancing of loans amongst themselves.

    It appears that auto finance companies have realised the importance of volumes in the fiercely competitive market for success. Despite the entry of several new car models and the availability of easier finance, not many middle class consumers are comfortable with current monthly payments (or EMIs as they are popularly known) and repayment schedules. But if volumes have to come in, the need of the hour is to reduce EMIs and increase loan tenures. With this round of interest rate cuts, the former has been taken care of to an extent. It remains to be seen how the auto finance companies address the latter demand.

     

     

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