The State Bank of Pakistan’s (SBP) recent decision to cut the policy interest rate to 12 per cent is a pivotal move that will ripple across Pakistan’s economy, including the car financing sector.
With this 100-basis-point reduction, gradually decreasing car financing rate in Pakistan is poised to experience significant shifts due to reduced borrowing costs and increased consumer affordability. Let’s break it down.
Lower Cost of Borrowing for Car Loans
Interest rates directly affect the cost of financing a car. Over the past two years, Pakistan’s car financing sector has faced a notable decline. In June 2022, outstanding auto loans peaked at approximately Rs. 368 billion. By December 2024, this figure had decreased to Rs. 235.45 billion, marking a reduction of about 36% over the 24-month period.
However, with the SBP’s rate cut, borrowing costs are expected to decline. Here’s how it looks for consumers:
- A 1% drop in interest rates can reduce monthly installments by approximately 7-10%, depending on the loan tenor and amount.
- For instance, if the monthly payment for a Rs. 1,000,000 car loan was Rs. 25,000 at 13%, it may drop to Rs. 22,500 at 12%.
With the SBP’s reduction in policy rates, commercial banks and financial institutions are likely to follow suit by lowering the interest rates on car loans. This will reduce the overall cost of borrowing for consumers, making car ownership more affordable. Monthly instalments for auto loans will also decrease, attracting middle-income households who previously found financing burdensome.
Enhanced Demand for Cars
Lower financing costs typically boost vehicle demand, and Pakistan’s auto industry is no exception. Recent figures illustrate a gradual rebound:
- FY 2022-23: Auto sales saw a 15% drop due to high interest rates and inflation.
- Post Rate Cut Projections: Industry analysts expect a 5-10% increase in sales volumes over the next six months as financing becomes cheaper.
As financing becomes more affordable, banks and leasing companies are likely to compete for customers by introducing attractive car financing packages. These could include reduced down payments, flexible repayment plans, or promotional interest rates. Consumers stand to benefit from these competitive offers, further incentivizing vehicle purchases.
Boost to the Secondary Car Market
The rate cut doesn’t just benefit new car sales—it also impacts the used car market. Many consumers who were previously deterred by high financing costs may now enter the market, opting for loans to purchase pre-owned vehicles. This could breathe new life into the secondary car market, which often offers more affordable options to budget-conscious buyers.
The SBP’s decision to lower the interest rate to 12% is a game-changer for Pakistan’s car financing sector. By making car loans more accessible and affordable, the move is likely to spur growth in both the new and used car markets, while revitalizing the auto industry as a whole.
