Finanstilsynet now proposes to halve the maximum repayment term for car loans. This means that although a payback period of up to 10 years can now be obtained, the longest payback period will be only five years if the Norwegian Financial Supervisory Authority steps aside.
– For car buyers, this will mean that the monthly cost will almost double for the same car and loan amount, says Derya Incedursun, Nordea’s consumer economist. He believes this will affect the market in several ways.
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Wed leasing
– This could lead to a reduction in new car sales. If loan financing becomes much more expensive, many more people will likely consider private leasing as an alternative. For some, the result may be that they choose a smaller, cheaper car – and for others, the change of cars may simply be postponed for a period, he believes.
In the Norwegian Automobile Industry Association, the move from Finanstilsynet is seen as a strange proposition with strange timing, according to communications manager Egil Steinsland.
– By halving the repayment period for car loans, the shift to the environment will also go slower, says Egil Steinsland of the Norwegian Automobile Industry Association. Photo: NBF
The green change is delayed
– Something similar has already been tried, without success. There is hardly any auto loan default, so on that basis there is no need for this. The argument about the value of the car is also incorrect: the car has an absolute value even after five years, so such a restriction is not necessary, says Steinsland, who also points out that very few car loans have a repayment period up to at 10 years.
– The vast majority are redeemed much earlier, he says.
– What will be the consequences if the proposal is adopted?
– New car sales will be significantly reduced. Many car buyers will not be able to afford refunds in 5 years. Therefore, we will struggle even longer with an older, more polluting fleet of cars, which can hardly be said to agree with the wishes of politicians for a rapid transition to zero-emission cars. The green shift will go slower, there is no doubt about that, Steinsland points out.
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Unsecured consumer loan
– Anyone still want a new car?
– Yes, and there could probably be an increase in private leasing, which, in a sense, will increase the risks to dealers and leasing companies. Others may want to transfer the purchase of the car into the mortgage, which often leads to a repayment in 15-20 years or more, and is the most expensive solution of all, says Egil Steinsland to Broom.
– For the loan with a mortgage other than a home, it is proposed that the financial institution requests the annual repayment as an annuity or serial loan, so that the loan is repaid during the economic life of the mortgaged object, in line with the fall in the market value, or forfeiture of the mortgage, but not exceeding five years.
According to Swedish Mortgage Law, the pledge of sale expires within five years of the delivery of the sale object to the buyer. After the loan is terminated, the residual loan must be reclassified as an unsecured consumer loan, according to Finanstilsynet’s proposal, says Derya Incedursun.
– With much more expensive auto loans, many are likely to opt for leasing instead, says Derya Incedursun in Nordea. Photo: Nordea
More expensive for families
– With a search in Finanportalen for a 700,000 car loan with a five-year term, effective interest rates from just under 5 percent to over 7 percent are provided. Eighty per cent of these employee loans had an agreed term of more than five years.
The average real duration of the loans varies according to the type of mortgage. To counter the vulnerability of households linked to this type of loan, it is, according to the Norwegian Financial Supervisory Authority, important that the loan is repaid within a relatively short period of time. A shorter repayment period means higher installments and a higher liquidity burden on the family, he adds.
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The resale value decreases
– What is Finanstilsynet worried about?
– Many items financed in this way, such as a car, will experience a noticeable decline in value in the years following their purchase. This means that the repayment period is not set too long to limit the overall spending of households on this type of loan, and to take into account that the consumer will no longer have a guarantee to provide the loan – and that the resale value decreases with the term.
With the proposed tightening of car financing, there may be calmer times on the sales premises. (Ill. Photo) Photo: Frank Williksen
Payable in five years
The Mortgage Law regulates the duration of sales mortgages and does not set direct limits on how quickly the loans must be repaid. However, preparatory work shows that the five-year deadline has been set to prevent the pledge agreement from being used as a guarantee for a longer-term credit. In Finanstilsynet’s assessment, this is a consideration that should have an impact on the repayment period.
– In order to avoid that the pledged scheme is not used to create longer-term credit guarantees that can increase the vulnerability of borrowers, according to the Norwegian Financial Supervisory Authority, the same requirement for payments should be established installments for such loans as for unsecured debt. This then means that even those loans must be repaid within five years, according to Finanstilsynet, Derya Incedursun finally says.
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