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Zero down Payment Is a Double-edged Weapon

Today we may observe a heavy growth of car credits. First of all, it’s explained by the aggressive position of carmakers, auto dealers, and car importers. They promote credit accommodation activity of banks. Business activity revival is a wonderful thing. Have we learned all lessons from the past crisis?

The main lesson seems to have been learned: currency credits are not provided in Ukraine. On 22 September, the Ukrainian Parliament adopted a relevant law with regard to all Presidential comments, so the draft law is likely to be signed and published in the nearest future. So what about other lessons?

A “zero down payment” turned out one of the most serious problem sources. Zero down payment car credits accommodated by banks in the previous periods “went off” in 2009-2010 and turned out one of the sources of serious problems for both banks and customers, by the way, as much as the zero down payment mortgage credits.

In fact, a zero down payment car credit is somewhat a provocative act of the financial institution. It often happens that a lender inexperienced in personal finance management issues is unable to assess the real car credit load on the personal budget. At the same time, the aspiration of Slavic people to demonstrate their status with cars, unlike the European people, pushes them into impulse purchases. Is the mentioned zero down payment credit a right tool in this very ambiguous situation?

On the other hand, when facing the first serious (or less serious) problems, a customer returns it to the finance institution and offers the lender to take a pledged car and arrange it sales with its own resources (without a clear understanding of the final effect of a lawsuit with the bank causing troubles to the rest of the customer’s property). Thus, a zero down payment car credit is a double-edged weapon which is equally dangerous for both the credited party and the creditor.

Nevertheless, we still hope that all professional players have come to all necessary conclusions. Certainly, the market situation proves that not everybody learned the lessons: the number of banks crediting car buyers with zero or close-to-zero down payments is increasing. When the circle of potential customers is narrow, there is a temptation to extend it through people not having funds on hand to pay down even 20-30% car cost. However, it’s worth pausing and thinking how you can credit a car for a man failing to save at least USD 2 thousand for the down payment. Are creditors ready to charge these “irresponsible” credits to losses as it happened two-three years ago and is still happening?

The effective rates for car credits are not the lowest ones: according to the latest assessment of CreditMarket Car Loan Index (the NBU methodology applies to the estimate, and insurance expenses are taken into account as well), they make up 34.96% on the average across the market. Currently, there is a clear trend of some loan appreciation. It means that lenders obtaining zero down payment car credits will have to pay back 4-5% car cost on the monthly basis within 4-5 years. Is the creditor sure that the customer who failed to save funds in the amount of 20-30% car cost will pay back 4-5% on the monthly basis?