WHY INSTALLMENTS ARE REDUCED BY 50% ON CAR/AUTO LOANS IN 2021-fusionstories

 

WHY INSTALLMENTS ARE REDUCED BY 50% ON CAR/AUTO LOANS IN 2021

 

To arrange an installment amount in time is a big confront for people who has opted car finance or auto finance to buy a car. Let us tell you that installments amount of auto loans has become 50% cheaper compared to what it was last year. This is because the State Bank has been reducing interest rate by another 1%, it is the fifth cut since March 17. In the start of January 2021, State Bank interest rate remains 7% that lowered down from highest 13% gradually. Now the KIBOR (interbank interest rate) is 7.169%. A significant decrease in KIBOR led to lower the interest rate on auto car loans.  

KIBOR is an abbreviation of :The Karachi Interbank Offered Rate. It is a daily reference rate based on the State Bank monetary interest rates where Commercial banks offer to lend unsecured loans to interbanks, household, Private business or to government. The current KIBOR rate in January 2021 is 7.169% for 3 M.  

WHY INSTALLMENTS ARE REDUCED BY 50% ON CAR/AUTO LOANS IN 2021

It is important to know that The State Bank of Pakistan’s monetary policy rate affects every interest rate in the market whether its auto financing, home financing or any other loan from any Pakistani bank. Commercial banks set their interest rates acceding to KIBOR + 4% - 7%. As soon as the SBP has reduced this rate, commercial banks interest rate also drops.

 

Earlier, the monetary policy rate peaked to 13.25% in July 2019, the interbank rates (called KIBOR or K) were close to 14%. Commercial banks were charging the customers KIBOR + 4% to 7% or even more. It raised the overall cost of loan interest rate to between 18% and 21% which has reduced to 12%-16% now. The KIBOR rates remains fix for one year, so is your installment amount.

The SBP has brought its rate down to 7% by 2021. KIBOR has stirred accordingly to 7.9%. Now the installment schedule or the first year payment schedule if you buy a new car will see nearly 50% reduction in the interest amount.

 

A customer who was paying PKR 35,000 as one month installment has seen reduction to PKR 20,000 towards its repayment schedule. After seeing significant reduction in interest rates, more people are opting car financing to buy new or used cars. The popular cars to be financed are the models of Suzuki, Toyota and Honda. Asides a large number of customers are getting bank finance to buy imported cars. The lower interest rate and lower installment schedule has boosted the economy and many people have got bank financed cars in 2020-21. This is called variable interest rate whereas fixed interest rate from banks is decided on:

• Amount of downpayment
• Selected tenure
• Type of car (used or new)
• Age of applicant etc

 

The increased use of ride services Uber and Cream have also pulled customers to get bank financed cars to be used as their passive or full time income source. It is easy for customers to arrange installment amount from driving on Uber or Cream.

   

 SBP is aimed to stimulate the economic growth by lowering the interest rates. Lowering interest rates makes borrowing or financing cheaper for individuals, businesses and the government.

 As far as the house financing, house loan is concerned then Government has initiated low cost house loans on fixed interest rate of 5% for first five years for the tenure of 20 years. The installment are fixed which is big relief for customers. 

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LOW-COST HOUSE LOANS IN PAKISTAN

 

 The SBP has been actively looking into decisions for the repricing of loans. The Monetary Policy Committee is taking appropriate actions to benefit interest rate reductions in form of lower costs on loans. It’ll then pass on to households and businesses that are still paying back their loans. The reduction in rates will led reduction in their repayment cost.

 

The SBP also aims to sustain and benefit households and businesses amid the prevailing crisis of corona virus. With the current reduction, the real rates on a forward-looking basis would be kept close to zero, which is appropriate under the current circumstances.

State bank is focused on controlling inflation and ensuring economic stability.  The central bank utilizes the interest rate to either boost economic growth or control inflation.

According to Consumer Price Index (CPI) i.e. an index to measure increase in prices of goods and services – for the financial year 2021 is expected to fall to 7% to 9%.  It’ll definitely boost the auto market in Pakistan and will lead to lower the car prices. High car prices are another big challenge in Pakistan which should also be addressed and solved by authorities.