The next time you’re stuck in traffic, don’t assume it’s due to construction work or an accident. It could because of your bank.
Record low interest rates and the availability of financing for up to 100% of the purchase price has enticed Israelis into buying new cars at record rates.
If the buying binge continues at its current pace, over 300,000 new cars will be added to the country’s already crowded roads in 2016. That is up from 254,000 last year and fewer than 205,000 in 2012, according to figures from the Israel Auto Importers Association.
The banks can’t be blamed for all the increased buying. Sales of new vehicles ballooned 40% over the past three years, while the number of car loans extended by banks rose by a more moderate 15%. Many in the auto industry say the official figure understates the true extent of bank lending for new cars.
“The banks don’t really know how much money they issue for car loans because not all loans are marked as such,” said one auto industry source, who asked not to be identified. “Anyone can get a sizable loan for whatever purpose with collateral, and often the loans are used to buy a car.”
As of the end of June, lending for new cars by banks and their affiliated credit card companies amounted to 9.7 billion shekels ($2.52 billion). It was the first time such a figure has been published, as the Bank of Israel instructed lenders to break out their auto financing from other consumer loans starting with their 2016 financial reports.
Banks accounted for 7.3 billion shekels of the loans, a figure that rose 1 billion shekels in the past three years. Credit-card companies accounted for the remaining 1.9 billion shekels.
An examination by TheMarker found that Bank Leumi is the dominant player. The bank has 3.3 billion shekels of auto loans on its books, compared to 2.6 billion shekels for Bank Hapoalim, its bigger rival. In addition, Leumi’s Leumi Card unit has made another 1.275 billion shekels in car loans, bringing the group’s total exposure to 4.5 billion shekels.
The terms banks and credit-card companies offer on car loans for consumers is irresistible. Banking courses said that consumers can easily get loans for 70% to 100% of a new car’s value for terms of two to four years at rates of prime plus 0.5 to 2.5 percentage points.
Monthly payments can be as low as a few hundred shekels, although many borrowers take out balloon loans that require a big final payment at the end of the loan term. Many car importers have deals with banks to provide buyers with loans.
From the lenders’ point of view, the risk with car loans is higher than, for example, property loans because the value of a car drops rapidly after it’s purchased. Moreover, the margin lenders earn on car loans is a narrower 1.5 points to 2.5 points, versus 4 to 5 points for general-purpose consumer loans.
Some course said lenders could be fueling a car bubble and indeed the Bank of Israel asked for a breakout of car loan data out of concern over the banking groups’ exposure. Auto loans account for just 6% of overall consumer lending for the groups, but at Leumi Card it is 14%.
Banks says they are confident about the market and point to a default rate of just 0.25%, compared with 1.25% to 1.5% for general-purpose consumer loans.
The bigger risk is to the credit-card issuers, said one banker, who asked not to be identified.
“In contrast to the credit-card companies, the banks have deposits and today their cost of money is close to zero, so they can aggressive in how much they are willing to lend for car purchases,” he said.