"The loan price is 10,000 cheaper than the full payment." How do car loans make money?
2024-08-11
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"Up to 0 down payment for all models", "Exclusive 24-month 0 interest loan", "0 down payment, 5-year ultra-long loan"... When you walk into a car 4S store, billboards and posters with loan discounts almost occupy the center of the show.
▲Source: Photo by Li Sitong, an intern at China News Service
Low interest or even no interest has become a weapon for car companies to attract consumers. Behind various car loan products are banks and auto finance companies competing for the auto consumer market. How do these car loan products have low interest or zero interest? Can banks and auto finance companies make money?
How to get a 0 interest loan?
Recently, a reporter from China Business Network visited several auto 4S stores in Beijing and Tianjin as a car buyer and found that compared with buying a car in full, the store clerks generally recommended installment loans and said that the price of a car purchased with a loan is cheaper.
At a FAW-Volkswagen 4S store in Beijing, a sales clerk said that the discounts for car purchases with loans are even greater, "For this CC380TSI, the normal discount for full payment is 45,000 yuan, and the discount for installment loans is 62,000 yuan." Taking the FAW-Volkswagen CC380TSI Dazzling Edition mentioned by the clerk as an example to calculate the price, excluding the interest of 7,000 to 8,000 yuan, buying with a loan is about 10,000 yuan cheaper than buying with full payment.
"Nine out of 10 people buy cars with loans." A salesperson at a GAC Aion 4S store in Tianjin said that the full price of a GAC Aion Y PLUS is 106,800 yuan, and the loan price is 96,800 yuan. The interest repayment for two years is about 8,000 yuan, but the total price of a loan is 10,000 yuan cheaper than the full price, and the money saved can cover the interest for the past two years.
"If there is no subsidy, the price of our car would be 133,000 yuan, and there is an interest-free loan." At a Geely 4S store in Tianjin, a salesperson said that there are discounts for loans from the Agricultural Bank of China, which is more than 10,000 yuan cheaper than the normal price.
However, the salesperson stressed that the cheaper price of more than 10,000 yuan was not a real discount. "Interest-free loans and discounts are separate things. It's impossible to borrow money for free and get a discount for free. Does that mean the bank can't lend out money?"
According to him, although the preferential price is paid in the early stage, the loan will be subject to monthly interest, which is equivalent to interest-free in disguise, that is, the price of the loan and the full payment are the same. "The final price is still the same amount of money, which is heavy to carry and hold."
According to many sales staff, car loans are often offered at a discount on the price of the vehicle, so that the buyer does not have to bear the loan interest burden. So why are loans cheaper than full payment? Where does the money for the "interest subsidy" come from?
"When I lend you money, the bank has to give us a commission, so we just deduct that amount from the price of the car."The above-mentioned GAC Aion salesperson revealed that a salesperson at a Ford 4S store in Beijing said: "The bank gives us rebates. For example, if it gives me 1,000 yuan, I give you 900 yuan. That's what it means."
▲Source: Photo by Li Sitong, an intern at China News Service
Is it cost-effective to take out a loan for five years and repay it in one year?
It is worth noting that although the 4S store states that the loan term is 60 installments, in order for the loan to be cheaper than buying the car in full, it is necessary to repay the loan in advance.
"This loan is for five years and repaid in one year. You apply for it based on a five-year period, but you can repay the principal afterwards in the 13th month because only the interest for the first year will be incurred. If you repay it for five years, you will incur five years of interest," the FAW-Volkswagen 4S store clerk explained to China Business Network.
A salesperson at a BYD 4S store in Beijing also said: "We provide you with a one-year interest subsidy in the car purchase plan, which means that the first year is interest-free. When you repay the loan to the 12th month, you can pay off the remaining principal in one lump sum and end the car loan early without incurring any penalty, handling fee, or interest in the second year."
The sales staff of the aforementioned GAC Aion 4S store said that the down payment of the loan is 20%, and the loan can be for five years. You can repay the loan in advance after two years of use. There is no penalty for early repayment. You can also repay the loan in advance after only one year, but you need to pay 3% of the remaining principal as a penalty.
According to feedback from many sales staff, the lending institutions currently provided by the store are mainly banks and the manufacturer's auto finance company. Most car buyers will choose to purchase with a loan, mainly because they can enjoy preferential prices on car purchases. Although they will need to repay the loan later, they can repay it in advance and can also manage the funds in hand, which is more cost-effective than paying in full.
From the perspective of car sales companies, providing loan plans to customers can reduce their financial pressure, thereby promoting transactions, and in some cases, retain a portion of the commission paid by the bank.
A salesperson who resigned from a 4S car dealership told China Business Network:His store has cooperative relationships with 7 or 8 banks. "If the customer can accept the full price to buy a car with a loan, then all the commission can be kept; if the customer is good at price comparison, we may give it all up (to the customer) in order to close the deal.If a 4S store can stay, it will definitely stay, but now the competition is fierce, sometimes it is impossible to stay even if you want to."
For banks, car loans are one of the businesses they must compete for. The reason why financial institutions pay commissions to 4S stores is to earn loan interest from consumers. A customer manager of a bank in North China revealed to China Business Network,The bank where he works generally offers a commission rate of 12%-15.5%, and different 4S stores offer different commission rates. "If we don't offer commissions now, we won't have business, and the powerful stores will continue to ask for higher commissions."
If the 4S store really said that the loan can be repaid one to two years in advance, the bank can only take back the commission paid in the early stage, so how can it make money?Not all customers are able to pay off their loans early.
At present, the annualized interest rate of consumer loans for customers with good qualifications is generally around 3%. According to visits, the annualized interest rate of most car loans is 5%, which is higher than the loan interest rate of consumer loans.
"If customers repay their loans early, the bank may not make money on its own auto loan business, and may even suffer a certain loss. However, there are several situations here." Huang Dazhi, a researcher at Star Map Financial Research Institute, analyzed to China Business Network that although customers currently enjoy preferential treatment and use early repayment as a prerequisite to calculate the loan interest burden, there is uncertainty as to whether they can repay the loan in time two years later. For those who do not repay the loan in time, the bank earns this part of the loan interest.
In addition, he pointed out that car loans are medium- to long-term loans, starting from three years and most of the time being five years. In this case, because the monthly repayment amount is relatively small, many people will not pay full attention to their interest burden.
Is the auto finance price war intensifying?
"From the current regulatory encouragement direction, banks and auto finance companies are supported to carry out auto loan business. Banks are encouraged to promote auto consumption, boost the entire consumer market and promote economic growth through financial support. This has become one of the reasons why banks are vigorously expanding their auto loan business." Huang Dazhi said.
In April this year, the People's Bank of China and the State Financial Supervision and Administration Bureau jointly issued the "Notice on Adjusting the Relevant Policies on Auto Loans", which clearly stated that:The maximum loan ratio for self-use traditional power vehicles and self-use new energy vehicles shall be determined independently by financial institutions;The maximum loan ratio for commercial traditional power vehicles is 70%, and the maximum loan ratio for commercial new energy vehicles is 75%; the maximum loan ratio for used vehicles is 70%.
From the perspective of the strategic value of banks developing auto loan business, Huang Dazhi believes that auto loan borrowers are usually high-income, high-quality customers. Banks can also do cross-marketing based on the auto loan business. For example, auto loan business inevitably involves card opening. In the process of handling related business and subsequent services, other business values such as wealth management, deposits, and insurance may also be generated.
"Although the market space for auto consumer finance cannot be compared with that of mortgage loans, its growth space is higher than that of mortgage loans, and the number of players is relatively limited," said Huang Dazhi.
The "2024 China Auto Finance Report" (hereinafter referred to as the Report) jointly released by WeBank and strategic consulting firm Roland Berger in May this year shows that China's new car finance penetration rate will be 56% in 2023, a decrease of 2 percentage points from 2022, among which the new energy vehicle finance penetration rate is slightly lower than the overall market level.The report predicts that by 2028, China's new car finance penetration rate will reach around 71%.
The report also pointed out that since 2023, competition in China's passenger car financial market has become increasingly fierce. In addition to the traditional leading large banks, auto finance companies and some professional financial leasing companies, there is also a shortage of regional banks, financial leasing companies, financial companies and other financial and service institutions rushing into the market.Price wars also exist in the auto finance market and are likely to intensify.
According to the list of legal entities of banking financial institutions released by the State Financial Supervision and Administration, as of the end of 2023, there were 25 auto finance companies in China, including Volkswagen Financial Services (China) Co., Ltd., Toyota Auto Finance (China) Co., Ltd., Mercedes-Benz Auto Finance Co., Ltd., BMW Finance (China) Co., Ltd., Dongfeng Auto Finance Co., Ltd., FAW Auto Finance Co., Ltd., Beijing Hyundai Auto Finance Co., Ltd., BYD Auto Finance Co., Ltd., etc.
In terms of market share, the report shows that the overall share of commercial banks in the auto finance market will reach 46% in 2023, a significant increase compared to 2022. Auto finance companies are under pressure from commercial banks and the weakening of the preferential support from OEMs. Their market share will decline to about 39% in 2023. The overall market share of leasing companies (including financial leasing and financial leasing companies) will further decline to 15% in 2023, a cumulative decline of 8% in the past three years.
▲Source: "China Auto Finance Report 2024"
Many banks have also disclosed the status of their auto finance business. For example, Ping An Bank's 2023 annual report shows that by the end of 2023, Ping An Bank's auto finance loan balance was 302.475 billion yuan, and new personal new energy vehicle loans were 36.803 billion yuan, a year-on-year increase of 47.8%. Shanghai Bank once revealed at a performance meeting that by the end of 2023, the bank's new energy vehicle loans were nearly 12 billion yuan, an increase of 204% from the end of the previous year. In the first quarter of 2024, the bank issued 2.1 billion yuan in new energy vehicle loans and installments, and the new contribution accounted for 35%.
The above report points out that, at present, it is difficult for institutions to design products that break away from the framework of basic elements such as interest rates, terms, and final payments. Products are highly homogenized, and price competition is increasingly unsustainable. There is an urgent need to explore ways to compete in a differentiated manner. Under the trend of standardization, the long-term sustainability of the commission model is in doubt, and the "channel is king" mentality needs to be changed.
The "Notice on Further Regulating Auto Finance Business" issued by the former China Banking and Insurance Regulatory Commission in December 2022 clearly stated that financial institutions should follow the Anti-Unfair Competition Law,The commission level shall be determined legally and reasonably based on the company's own operating costs, market operation reality and the actual cost and quality of the services provided by dealers. It shall not pay unreasonable high commissions to dealers, nor shall it pass on operating costs to consumers.
In September 2023, the Financial Regulatory Administration will carry out a special campaign of "doing practical things for the people" to further rectify the problem of "high rebates" in auto finance business, standardize market competition order, and promote the stable development of the auto finance market.
"In the field of auto loans, it is a compliant behavior and an industry practice for financial institutions to pay commissions to auto dealers, but it should be viewed from two perspectives," said Dong Ximiao, chief researcher at CMB.com. Car loans are mainly marketed by dealers, and dealers work hard, so it is reasonable for financial institutions to pay commissions, which is also in line with regulatory requirements. However, commissions must be paid reasonably and moderately, and "price wars" and vicious competition cannot be launched on commissions, nor can excessive commissions be paid or passed on to consumers. In this regard, financial institutions should enhance their awareness of compliance, and industry associations should strengthen guidance on industry self-discipline.
(China News Service)
