Financial Industry Steps Back from Marketing... Some Suspend New Loans Amid Bond Market Tightening
[Asia Economy Reporter Yoo Je-hoon] # Kim Jin-beom (38), an office worker living in the Seoul metropolitan area, was about to receive his new car after an 11-month-long wait, but the aftertaste is unsatisfactory. At the time of ordering the new car, the interest rates for auto installment loan products from card and capital companies were very low, around 3%, but he heard that within less than a year, the installment loan interest rates had jumped to 6-7%.
# Lee Ui-yong (42), who works in the transportation industry in Jeonnam region, also recently knocked on the door of a capital company but had to turn back. His company had a leased vehicle and inquired about a loan from a capital company, but due to the recent tightening of the bond market, the capital company said they would not provide new loans. He said, "I am considering whether to take out a loan from mutual finance institutions."
The auto installment finance (auto loan) market, which was a main source of revenue for credit specialized financial companies such as card and capital companies, is freezing up. This is due to difficulties in raising funds caused by consecutive base rate hikes and the bond market tightening triggered by the 'Legoland incident.' Some credit finance companies have stopped issuing new loans or have even resorted to demarketing (marketing that intentionally reduces customer demand).
According to the Credit Finance Association on the 11th, the interest rates for auto installment finance products from domestic capital and card companies have recently risen to around 6-7%. Assuming the purchase of Hyundai Motor's Grandeur, the top-selling model in the domestic finished car market (based on last year), with a down payment ratio of 30% and an installment period of 60 months, Hyundai Capital, an affiliate of Hyundai Motor and Kia, showed interest rates ranging from a minimum of 4.2% to a maximum of 9.0%. Other leading capital companies showed rates of 7.2-7.9% for KB Capital and 6.6-9.6% for Hana Capital.
Interest rates for card companies, which are in a more advantageous position than capital companies in terms of fund raising, have also increased. The auto loan interest rate for Shinhan Card, the industry leader, was 5.6-6.0%, followed by Samsung Card (6.5-7.2%), KB Kookmin Card (6.2-6.3%), Woori Card (5.9-8.1%), Hana Card (5.4-5.9%), and Lotte Card (8.4%), mostly clustered in the 6-7% range. Considering that Hyundai Capital, which handles the largest volume of auto loans, had an average actual interest rate of 3.61% in the third quarter of this year, this represents a significant increase.
The reasons for the sharp rise in auto installment interest rates include base rate hikes and difficulties in fund raising due to recent bond market tightening. According to the Korea Financial Investment Association's Bond Information Center, as of the 9th, the interest rate for 3-year bonds rated AA+ (Shinhan, Samsung, KB Kookmin Card) was 6.030%, up 161 basis points (1bp=0.01%) from 2.420% at the beginning of the year. Early this month, an A-rated card company with an AA- credit rating issued bonds at 6.541%, and a B-rated capital company with the same rating issued bonds at 6.922%. Considering both companies issued bonds at rates around 2.5-2.6% at the beginning of the year, the actual cost of raising funds has more than doubled. Recently, the bond market has tightened, making even bond issuance difficult.
The auto installment finance market has traditionally been handled by capital companies as their core business, but with card companies, which have an advantage in fund raising, entering the market, it has become a fiercely competitive arena over the past few years amid a surge in car sales. Domestic card companies' auto loan handling volume surpassed 10 trillion won for the first time last year.
However, as the 'money circulation blockage' phenomenon has not been easily resolved, credit finance companies are reducing their business by engaging in demarketing or stopping new loan issuance. A source from the credit finance industry said, "While card companies and large capital companies are relatively better off, many small and medium-sized capital companies are practically stopping new loan issuance because refinancing through credit bonds is not possible, focusing instead on recovering existing loans. This affects not only corporate finance but also the retail sector."
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