As January begins, the automotive sales spotlight falls on low-interest financing offers. Kia is applying a 3.25% installment rate for January deliveries of the Morning model. BMW is also offering rates in the 1% range for some models, while Renault Korea is applying a 2.9% rate for major models. These low rates come when using their own financing products.
The average car installment interest rate in the market has sharply risen, surpassing 10%. Due to structural reasons, car sales companies or affiliated finance subsidiaries cannot sell car financing at rates lower than market rates. This is because they are non-depository financial institutions and cannot accept customer deposits.
Hyundai Capital, Mercedes-Benz Finance, and BMW Finance are examples of non-depository financial corporations. They borrow money from other sources and apply a certain interest rate when selling installment or leasing products. They must charge a higher interest rate than what they paid to borrow the money to operate.
As a non-depository financial company, car finance companies borrow money at a reference loan rate of 6%, which is higher than the Bank of Korea’s base rate of 3.50%. They then add 2-3% interest and approve the installment plans for customers. This structure results in a 10% interest rate. Offering a 1-2% financing rate under these conditions means that they incur losses equivalent to the difference in the interest rates.
A source within the car finance industry stated, “Ultimately, they are borrowing money based on market loan rates to approve installments for customers, meaning that in principle, no-interest or low-interest installments cannot exist. Offering low-interest installments implies that they are borrowing money from someone else and incurring a loss.”
Nevertheless, the reason low-interest or no-interest financing is possible is due to “manufacturer support funds,” according to this source. This support fund helps cover the interest rate gap, allowing them to sell products at lower rates. Essentially, this amounts to a sales discount.
Currently, according to the Automotive Financial Association, BMW Finance’s rate stands at 9.49%, while Mercedes-Benz Korea lists 10.38%. Installment products sold at lower rates are essentially subsidized by manufacturers in the same amount as the interest rate differential. The 1.9% installment rate applied to the BMW 523d or 530e translates to a support fund amounting to 7.59 percentage points, indicating that for the BMW 523d xDrive M Sport, priced at 80.3 million won, the estimated support fund would be about 6.02 million won.
Last month, the Volkswagen Tiguan and Audi A6 models, which were sold with no-interest financing offers, likely reflected the full vehicle support of Volkswagen’s finance disclosure rate of 8.99%.
An industry insider remarked, “Such low-interest auto financing is not vastly different from when customers purchase smartphones using device support funds instead of opting for a contractual discount.”
Lee Sang-jin daedusj@autodiary.kr