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New down payment law dents car sales.

Summary: The minimum 25 percent down payment imposed by the Central Bank on car loans caused a 6 percent decline in the total number of registered new and used vehicles during January 2015 compared to the same month in 2014, a statement issued by the association of car importers in Lebanon said.

BEIRUT: The minimum 25 percent down payment imposed by the Central Bank on car loans caused a 6 percent decline in the total number of registered new and used vehicles during January 2015 compared to the same month in 2014, a statement issued by the association of car importers in Lebanon said. "The total number of registered new and imported used cars during January 2015 dropped by 19 percent in comparison with December 2014, 6 percent compared with January 2014 and 8 percent compared with January 2012 and 2013," it said.

On Aug. 21, 2014, the Central Bank issued a circular ordering all banks and financial institutions to require a minimum down payment of 25 percent for any car or housing loan and stipulated that the monthly installment should not exceed 45 percent of family income.

Once further costs such as insurance and registration are taken into account, the down payment can exceed 35 percent of the car's price.

The circular stated that the decision would become effective as of October 2014.

"The circular had a bad impact on registered new car sales, which have dropped by 26 percent in January 2015 compared to December 2014," said Selim Saad, head of the car importers' association.

Saad emphasized the importance of banks imposing a down payment on car seekers, but he does not favor such a high rate.

"We appreciate the Central Bank governor's efforts in protecting the banking system and we fully support imposing a down payment on car seekers but we don't want it to be that high in a bid to avoid any negative impact on car sales," he said.

A banker told The Daily Star last month that the decision aimed to organize retail loans and at the same time reduce any chance of default on payments. He added that the default ratio in car loans was less than 5 percent, and although this ratio was relatively low, the Central Bank felt the sector should be more protected for both banks and consumers.

However, executives at at least one car dealership claimed that the down payment requirement has less to do with preventing defaults and more to do with containing the number of cars on the road.

"Banks make a lot of profit from car loans," one executive said on condition of anonymity. "This requirement does not serve their interests."

Anthony Boukather, CEO of A.N. Boukather, exclusive dealer of Mazda cars, said: "This decision is not very logical for the time being because we do not have an efficient public transportation system as an alternative for people who cannot afford to buy a vehicle."

Boukather said the decision has mostly affected people in low-income brackets seeking to buy small cars.

Statistics provided to The Daily Star by City Car, a car subagent, show that Hyundai and Kia were the most affected by the new circular as their sales in January 2015 dropped to 679 cars from 902 in the same period in 2014.

As for Daihatsu, Honda and Mazda, the number of cars they sold increased to 970 in January 2015 from 818 in January 2014.

"The circular has mostly impacted the sale of cars priced at $20,000 and less because buyers of more expensive cars earn higher incomes and are usually capable of paying a high down payment or a higher monthly installment," said Ali al-Khatib, sales manager at City Car. "We are doing some promotions but even if we cut our prices by $1,000, for instance, the main problem is still there."

Likewise, Rita Sobhi, sales manager at Kia Motors, said people today think twice before buying a new car, even if it is a small one. "The circular had a very bad impact on sales," she said, adding that the deteriorating economic and security situation have also had an impact.

Car dealers interviewed by The Daily Star said they hope the Central Bank will revise its circular in a way that would help car sales pick up again, but there is no indication of plans to revise the requirement in the foreseeable future.

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Publication:The Daily Star (Beirut, Lebanon)
Geographic Code:7LEBA
Date:Feb 18, 2015
Words:749
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