A list of 21 vehicles, for which buyers will receive auto loans, has been released.
The auto loan ceiling has been set at 250 million rials ($7120 at market exchange rate) with an interest rate of between 16-18%. The payback period is a maximum seven years or 84 installments, Mehr News Agency reported.
The Central Bank of Iran will be providing the loans to banks, which will have to repay the amount with a 14% interest rate.
The loan will cover 80% of the car’s value or less depending on the price of the vehicle. Customers need to make a down payment of 20% of the value of the vehicle, but slightly less in the case of the Kia Pride pickup.
The ceiling of auto loans provided in the past used to be 150 million rials ($4,270). Customers had to pay the amount back over 36 months with an interest rate of 20%.
By referring to Iran Khodro and SAIPA dealerships from November 9, customers will have to pay the down payment and provide checks for the rest.
The list of official dealerships taking part in the auto loan plan has been announced by the CBI and the Ministry of Industries, Mining and Trade.
Ali Asghar Mirmohammad Sadeqi, head of CBI’s Department of Capital Assets, had said that people do not have to personally approach the banks for the car loans.
Iran’s auto sector has been struggling for six months, with some experts declaring that the industry is on the verge of collapse. Thus, the government has taken this measure to help kickstart the industry.
Iranians tend to purchase more cars during the summer-time due to the holiday season. However, this year most buyers joined a grass-roots campaign “Say no to local cars” while demanding higher quality and more affordable prices.
At present, another campaign “Say no to auto loans” has been launched to dissuade prospective buyers from taking these loans.
Those who criticize the new loans say the reason why Iranians decided to boycott the purchase of cars was not because they did not have the cash, rather they were protesting the overpriced cars of low quality.
And these problems have not been addressed, which is why they have decided to campaign against the auto loans, Donya-e-Eqtesad reported.
The report states that if there is high demand for the loans, the period might become shorter and banks might refuse to provide the loans up to six months, which is not unlikely.
What this means for the success of the loan remains to be seen, but it is likely that alterations to the loan may come further down the line.
No Vehicles Over 500 Million Rials
IKCO’s CEO has also clarified the cars eligible for the new auto loan.
Hashem Yekezare said cars produced by IKCO, valued above 500 million rials, are not eligible for the new loan.
According to in-house experts, the official inflation rate now stands at 15%, some 1-3% less than the loan offered by the automakers.
However, according private banking institutions, the real day-to-day rate of inflation currently stands at 16%.
The IKCO chief said: “We forecast good sales with this new incentive and welcome people to join the new scheme as long as it meets their financial requirements. “
5 Reasons Why Auto Loan May Work
The auto loans extended by the government through the Central Bank of Iran as of Monday are not only aimed at giving impetus to the lackluster car industry, but could also help people buy an automobile on easy terms.
The following reasons may just assure the success of auto loans in achieving the above-mentioned objectives:
The Interest Rate
The interest rate for the new auto loan is pegged at 16-18%, depending on the value of the car. This is just 1-3% higher than the rate of inflation. As the CBI-backed loan is generally cheaper than other privately offered loans, it can be offered without the need of third parties adding their own percentage to the overall cost.
The government has not stated yet whether the loan will track the rate of inflation, which is expected to decrease over the course of the life of the loan. If it does not, it is likely the monthly payment cost of just 5 million rials will become more costly for the car buyer.
However, as our in-house experts indicated, this is likely to be offset by the annual compound inflation that will make the final payment for the vehicle negligible for the purchaser.
The Rarity of Credit
As credit is very hard to come by and private loans offered by banks continue to hover above 20%, many people have been put off from the gross amounts of interest they have to pay back.
If the car buyers choose to pay off earlier, they must pay an early payment fee (fine) for cutting the period of the loan.
The fact that the loan has been stretched to four or seven years is a godsend for car buyers who previously faced excessive loans in shorter bursts. And the fact the loan is coming directly from the manufacturer means the car buyers should not face any sneaky surprises further down the line.
The loan also means that for the brief period in which it is offered (currently six months), the loan will be the best offer in town to get car buyers shrug off their hesitation toward domestic cars.
Average Age of Cars
As Iranian car buyers have been priced out of buying cars due to wages not keeping up with the rate of inflation, the current car stock is believed by some recent estimates to be over 17 years old.
According to the Iran Emissions Management, this compares with the international and European average of 8.3 years. Currently, the average age of the British car stands at 7.44 years, according to the British Car Buyers Association.
Due to the hyper-inflationary effects over the past five years, stemming from the bad planning of the former administration, car buyers in Iran have been stuck with their aging fleet of vehicles. Coupled with the drop in personal spending power and an increase in other expenses such as property prices, car ownership had fallen down the priority ladder.
Good for Carmakers
Carmakers have faced a drop in demand, partly caused by the recent nuclear agreement and the prospect of foreign auto players entering the market through local companies like IKCO and SAIPA, to name a couple. Vehicle production declined by 12.2% in the first seven months of the Iranian fiscal year (ended October 22) compared with the same period of last year. In total, 284,472 passenger and heavy-duty vehicles were produced in the period.
Earlier in the week, statistics by the Industries Ministry showed that in the past seven months, vehicle production declined at Iran Khodro Co. and SAIPA by 14.4% and 13.4% respectively.
The production of passenger cars declined by 5.1% during this period and reached 503,000 units. With a 2.5% decline, 273,000 units of the passenger cars were produced at IKCO.
The situation was worse at SAIPA, as passenger car production declined by 11.5% with a total output of 180,000 units. During the month ending October 22, vehicle production nearly halved compared with the same period of last year. Car production at IKCO and SAIPA declined by nearly 60% and 52.2% respectively, marking an overall 54.6% decline in car production.
While the number of most passenger cars produced at IKCO—including Peugeot 206, Samand and Dena—had declined, the company’s L90 model (globally known as Dacia-Logan and produced jointly with Renault-Pars) has been in high demand among Iranians and its production increased by 903% during the monthlong period. Passenger cars produced at SAIPA also declined by 50.3% during the time.
Removes Older Vehicle Stocks
The government is in negotiations with multiple foreign car companies, including Volkswagen and Peugeot, and either one of these carmakers, or both as it may turn out, are looking to offer new vehicles in the local market. For Volkswagen, which has years of experience in emerging markets like Brazil and South Africa, it already has a wide range of low-cost newly-developed vehicles to offer in the Iranian market. Peugeot, too, has stated that more recent models may be entering the local market.
These new models are not the only ones currently being offered by the carmakers and ultimately the technology being used in the new generation of cars cannot be carried over from the current stock.
In other words, what this new offer enables the carmakers to do is to shift their vehicles to make way for future models, which some may say is actually beneficial for car buyers looking for a new car rather than a new stylish model.