Beware of hidden charges in auto financing

Competition heats up after banks joined auto market

By Kim Da-ye

Staff reporter

Installment plans for purchasing a new car have never been more diverse as Korean banks recently joined the 13-trillion-won auto loan industry, which credit companies had previously dominated.

Now, with competition becoming more intense, car buyers seem to be the winner, benefiting from various loan deals including no handling charges as advertised by banks and greatly lowered interest rates offered by "capital" firms ― credit companies specializing in auto installment plans.

Sound too good to be true? In truth, these great deals aren't just available to anyone, as most auto loans come with unseen conditions or extra charges. For car buyers, comparing different options is now more important than ever in finding the best deal.

Players in the market

Last year, nearly 1.5 million new cars were sold, and a whopping 47.3 percent of them were purchased on installment plans, the Financial Supervisory Service's statistics show. Further, more than 10.7 trillion won was spent on installment plans for new car purchases.

Until recently, this lucrative auto loan market had been shared by about 20 credit companies, with Hyundai Capital boasting a 60 percent market share.

Hyundai Capital's strong performance has been based upon its close relationship with dealers from Hyundai Motor and Kia Motors. Additionally, its car loan products have been actively sold to customers through dealers who sort through most a customer's car loan paperwork.

With this help from dealers, car buyers not only save the headache of seeking loans from banks, but also auto capital companies, in general, have been generous with customers with relatively poor credit ratings.

A Hyundai Motors dealer who identified himself as Lee says that, in today's market, unless a customer is a delinquent borrower, he or she can get a car loan from a capital firm. Lee says he recently had a customer who had a temporary job and a not-so-small amount of debt, but was still able to receive financing of more than 10 million won.

However, capital companies' installment plans do not come cheap to car buyers. As an example, Hyundai Capital's interest rate for the 36-month plan includes fixed monthly repayments of 8.75 percent. Buyer beware, though, as the real interest rate soars to 11.49 percent after a three percent handling charge is added to the bill.

Furthermore, when buyers need a larger loan than their credit ratings allow, their new cars will be put onto their home mortgage, resulting in their having to pay additional fees for the transaction. Indeed, car buyers with poor credit ratings are more likely to have their cars put onto their monthly mortgage, and Lee, the Hyundai Motor dealer, says that vehicles are usually mortgaged when more than 20 million won is borrowed.

Here's where the entry of credit card companies and banks into the auto loan market is welcomed by consumers. Two leading credit card companies with popular installment plans, Samsung Card and Lotte Card, do not bill their customers for handling charges or mortgage fees. The interest rates for Samsung Card's and Lotte Card's 36-month plans are nine percent and 8.5 percent, respectively.

Samsung Card, for example, aggressively promotes that no handling charges and no mortgage fees means car buyers would save up to 1.63 million won when they choose the credit card firm's car loan over a capital company's.

Furthermore, both Samsung Card and Lotte Card tout no early termination fee when borrowers pay back before the expiration date of the installment plans. And car buyers can collect points and mileage that vary depending on the type of credit cards used for the loan.

Though banks are only the latest lenders to join the auto loan market, they sound the most ambitious. The much-publicized Shihan MyCar loan from Shinhan Bank offers interest rates of below seven percent. The loan charges no handling fee, does not attach cars to home mortgages and allows car buyers to borrow up to 50 million won for as long as five years. An even more attractive lure is that the sum borrowed on the Shinhan MyCar loan will not be counted as part of the buyer's personal credit limit.

Balancing factors

Low interest rates and no extra fees would make installment plans from banks look the most attractive. But consumers soon learn that banks' auto finance products are mostly loans on credit for those gainfully employed. The Shinhan MyCar loan, for instance, targets 25-year-old or older employees who can provide records of earnings.

Observers also point out that car buyers' credit ratings should be better than average. Although there are no written rules, those with credit ratings of five or better can be cleared for auto loans from banks. Credit ratings range between one and ten, with one being the most credit-worthy. As with all loans, this is determined by the borrower's history of loans, credit checks, and any overdue bills.

"Because of banks' strict conditions on lending, the number of customers is limited. Why would people with decent incomes and good credit ratings buy cars on installment plans?" asks Lee, who says he feels auto loans from banks do not serve their purposes.

Despite attractive deals and much publicity, in fact, installment plans by banks have been slow to be accepted by car buyers. Shinhan Bank reported that, as of June, it had sold 3174 Shinhan MyCar loans worth 49.9 billion won since its launch in February. However, this figure is in sharp contrast to the 10.7 trillion won that capital companies lent last year.

Banks now face stiff competition from capital companies, especially Hyundai Capital, which has recently slashed interest rates for popular models from Hyundai Motor and Kia Motors. In fact, the interest rate for the 24-month loan for Avante has dropped to zero percent ― partly because the new model Avante MD is coming to dealers in August. The interest rates of the 36-month plans for Kia's Forte and Hyundai's Grandeur have also been reduced to five percent, exclusive of handling charges.

These low rates, however, may also have hidden costs. For Hyundai Capital, consumers have choices between the normal interest rate and the discounted rate. When car buyers choose the latter, the actual price cut they are eligible for on Hyundai or Kia cars might be reduced.

Consumers should also be aware that credit checks with capital companies that are part of the second finance sector negatively affect their credit ratings.