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17 Jun 2022

Financial Institutions

Outlook for Used Car Loans 2022: Opportunity to grow on account of pricing, while rising sales volume limited by a decline in car auctions (Business Brief No.3975)


​​         KResearch assesses that used car loans in the commercial banking system in 2022 are projected to rise to 5-7 percent of total used car loans, approximately THB 300 billion, thanks to the pricing factor as reflected by the Used Vehicle Price Index (UVPI) and intense competition among commercial banks to expand high yield loan portfolios. Meanwhile, the sales volume of used cars this year is expected to grow 3-5 percent, or approximately 600,000-700,000 units, due to a smaller supply of cars entering the market, in line with a decline in car auctions in the financial institution system.
         However, close attention should be paid to how non-performing loans (NPLs) may increase after supportive measures were gradually terminated earlier this year, particularly for special mention loans (SMs) or Stage 2 classified loans according to TFRS9 which account for 12 percent of total loans, which may deteriorate to NPLs due to the inflationary pressures and the high cost of living since early this year which have directly affected loan repayment capability, as well as the more prudent loan approval guidelines, especially towards borrowers’ debt servicing capability.
        The signal of a rising policy rate during the second half of 2022, in response to the latest policy rate hike of 0.75 percent by the Fed and high Thai inflation, may result in gradually rising used car loan rates, particularly by non-banks, focusing on groups with potential risks such as older vehicles, and car brands that are less popular in the market, as the financial costs of non-banks are increasing faster and to a greater extent than those of commercial banks. Competition among used car loan providers using pricing factor or low interest rates may be less intense. This is because the used car loan rates are fixed through the loan term, while interest rates continue to trend upwards, possibly affecting the long-term returns, including the previous loan agreements offering lower rates.
        Close attention should be paid to the revised regulations regarding the hire purchase business as implemented by the Office of the Consumer Protection Board (OCPB), particularly the issues about the “Return the Car, Settle the Debt” scheme and interest rate discounts for loans fully repaid prior to maturity. These measures could result in returns that are less than expected, and banks and finance companies providing used car loans may need to establish more prudent credit policies, i.e. increasing minimum down payment, which may affect loan extension accordingly.
        The overall economic situation and household income in 2022 may have already been bottomed out, and both show signs of gradual recovery. But accelerating inflation pressures have impacted household purchasing power in part by reducing their capability to buy new cars, consequently increasing demand for used cars. Given that more commercial banks are entering the used car loan market, loan applicants can take advantage of lower loan rates. However, due to rising interest rate trends, consumers at the lower end of the market applying for used car loans from non-banks may have to shoulder the higher interest rates. Meanwhile, the OCPB’s imminent release of a new notification governing hire purchase contracts has probably helped limit interest ceilings to some extent. However, close attention should be paid to other impacts from credit approvals by the service providers, which must be seriously considered in order to control business risks.

Financial Institutions