What does the convergence of the total cost of a car loan and the weighted average rate indicate?

According to the United Credit Bureau (UCB), in October the total cost of credit (FCC) and the weighted average rate in the car lending segment were almost equal and amounted to 17.4% and 17.7%, respectively. The last time such a convergence was observed was in April 2022, when the key rate reached 20%. The reason is the increase in loan terms, subsidizing rates on the part of car dealers in the face of risks of stagnation of the car loan market, as well as the exhaustion of the limits of preferential programs.

At the end of October this year, the total cost of the loan and the weighted average rate in the car lending segment were almost equal and amounted to 17.4% and 17.7%, respectively. This is evidenced by data from OKB (part of the Sberbank ecosystem). The last comparable convergence of these indicators was observed on the market in April 2022, when the PSC was 0.5 percentage points higher than the average rate in the car lending market and reached 25.9% (the key rate from March 5 to April 15 was 20%). Traditionally, the difference between the PSC and the average rate in the car loan segment reaches 2 percentage points.

“The car loan market is clearly segmented into two parts – lending for new cars and used cars. For new cars, there are usually preferential programs supported by the state or directly by manufacturers,” notes OKB General Director Mikhail Aleksin. “Changes in average interest rates and PSC strongly depend on the ratio of these two segments.” “For example, in the spring of last year, when many brands left the Russian Federation, the car sales market, and with it car loans, strongly shifted towards used cars, we saw a sharp increase in the average rate, and by the end of 2022 and throughout the current year, as growth of parallel imports, the share of the new car segment began to recover, which led to a gradual decrease in rates and PSC,” he continues.

According to Kommersant’s interlocutors in the car lending market, the decline in the PSC could also be influenced by new standards for advertising financial services, which oblige banks to indicate the PSC in advertising materials (see Kommersant, October 18). In addition, following the rise in prices for motor vehicles, the average amount of a car loan is growing, and, accordingly, banks are increasing loan terms to maintain business margins. With this approach, regular payments for the borrower increase less significantly, adds Vladimir Teterin, senior director for bank ratings at the Expert RA agency.

“The convergence of the real cost of a loan with the nominal value may also be due to a narrowing of the number of financial services taken into account in the calculation and offered to clients through dealers by partner banks. At the same time, car dealers are trying to factor their costs (including currency volatility and the introduction of new government fees) into the final cost of the car. To ensure the level of issuance, banks can narrow the margins in this segment, compensating for it with other products,” says Konstantin Borodulin, director of bank ratings at NRA. In 2023, subsidized tariffs from brands – in particular, installment plans – had a strong impact on market price statistics. They eroded the average, admits Ekaterina Konova, director of the retail car lending department at Rosbank Auto. Now the impact of preferential car loan programs on rates has become minimal. New program funds were exhausted in November, and no new limits are expected until the new year (see Kommersant on November 24).

According to Frank RG, in October, car lending showed the greatest growth in the retail segment. 115.8 thousand car loans were issued, which is 19% more than a month earlier (see Kommersant on November 9). Their volume reached 166.5 billion rubles. The recovery came after two months of declining figures.

The current key rate (15%) may limit risk and approval, reducing the number of potential customers who would be willing to use car loans when buying a car. The entire market is feeling this, admits the head of Otkritie Auto (the auto business unit of Otkritie Bank) Marina Dembitskaya.

Polina Trifonova