Car Buying, China Style: No Credit, No Problem
As China’s car market no longer delivers the obscene growth rates it used to deliver (pretty hard when you compare with prior-year months where car sales jumped nearly 100 percent), carmakers are looking for clever ideas to light a fire under their Chinese sales. They all come up with the same solution: Attractive loans.
But nobody wants them.
An attractive loan, China style, is laid out by Gasgoo: You buy a Honda City for some $16,000. A 30 percent cash down payment is required, and all taxes have to be paid. $6,800 cash on the barrel-head. The remainder is to be settled in 18 monthly payments of $590. For a Honda City.
No wonder that only 8 percent of the Chinese are buying a car on credit. That number is actually trending down. It’s not just that the terms are less than fascinating. Buying anything else than a house on credit just isn’t the Chinese way. You either have the cash, or you have a bicycle.
China’s carmakers look longingly westward, where captive financing arms bring 30 to 50 percent of the profits to their mothership’s bottom line. Not in China. Which doesn’t stop them from trying. Chery started the Chery-HuiShang Bank Auto Financing Co. Other manufacturers are doing the same.
“From 2000 to 2009, the automobile industry has maintained a high speed of growth. However, only 8 percent of consumers choose to buy their cars by loan,” said Xu Xiaohua, General Manager of CITIC Bank Headquarters’ Auto Finance Center. “The car loan market definitely has an attractive prospect of development.”
Or none at all.
Hang on a half second here... The math does not add up for me. Leaving the taxes out of it for the moment, 30% of $16,000 is $4,800 leaving $11,200 to be paid. $590 times 18 months comes up to $10,620. That's $580 short for an effective rate of -6.65% APR. Let's say that we add one more payment and it's 19 months, then the interest cost over the life of the loan would be $10 or 0.11% APR. If on the other hand $16,000 is the total cost with the tax included, then $16,000 minus $6,800 over 18 months at $590 has the cost of borrowing up to $1,420 or 18.68% APR. So which is it? Actually, I just looked at the referenced story and I see that the APR is actually 0% and the numbers quoted are approximate, not exact and further rounded off in the conversion from CNY to USD. The problem with the loan is the short term, not the high interest as implied by BS.
I buy cars the same way, cash. When I look at the foolish payments people try to get out of on leasetrader, I am amazed. Kids out of college leasing a 3-series, when they should be buying a used Civic.
"They all come up with the same solution: Attractive loans." Dammit. "But nobody wants them." Thank God. China, DON'T DO IT!! WALK AWAY! WALK AWAY!!
I'm pretty sure it works this way in Germany as well. This also explains why you can so customize German home market cars...you save a long time, research, custom build, and wait to pick up. Here, you just show up to mega-auto, who has 12 of kind of what you want, upsells you the two option packages you didn't want because it is on the lot and ordered by the sales manager who has an eye towards universal appeal and profit return. And they are all fives shades of silver...because it offends no one.