Customers advised to study best option for car financing

PETALING JAYA: It is imperative for customers to study the best auto financing options offered by commercial banks before making a decision, says the Association of Banks in Malaysia (ABM).

That is because banks will come up with slightly different rates based on their cost of funds, business models and other factors.

“Any changes in the interest rate structure for car loans will be premised on the objectives of ensuring the sustainability and viability of the HP (hire purchase) business, besides that of narrowing the mismatch and gap between the funding cost and lending rates,” ABM executive director Chuah Mei Lin said in a statement.

“Notification of any interest rate changes will be made by the banks promptly to all respective stakeholders, including their panel of car dealers,” she said yesterday.

The statement was issued in response to The Star’s report yesterday that interest rates on car loans would be raised soon and would likely affect non-national cars.

The changes expected include:

·A tiered rate structure with lower interest rates for shorter tenures;

·Lower interest rate tier for new national cars for the shorter five- and seven-year tenures;

·Streamlining of interest rates between new non-national, new national and used cars; and

·Rationalisation of rates for new non-national and used cars.

Chuah said interest rates for car loans were determined by commercial banks based on their cost of funds, funding availability, loans growth and business strategies.

“Funding for this type of portfolio is generally through hedging with long-term funds such as interest rate swaps (the borrowing and lending swap rates for banks), Cagamas Bhd (the country’s biggest buyer of home loans) or internal funds transfer. Typically, longer tenure loans attract higher funding cost on the part of the commercial bank.

“At this time, and based on the prevailing interest rates for car loans, there is a mismatch or gap between the funding cost to the commercial banks and the interest rates for car loans,” she added.

For example, the average interest rate swap for seven years is 3.85% while the Cagamas rate for the same tenure is 5.3%. As in all costs of doing business, she added, a small overhead cost and provisioning were added to the main cost component, that is the banks’ cost of funding.

“The prevailing interest rates for car loans (which have become very competitive in the non-national segment) do not accordingly address the funding cost and/or the cost of doing HP business,” Chuah stressed. For latest Bursa Malaysia indices, charts and other information click here

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