Car Interest Rates

[snpark]

All of the above
Banking in general in Indonesia and how advanced it isn't

 

[jukung11]

I was aware of loss leaders and financing from car companies to increase sales. My question was looking for private banks. The answers about car company financing now has me a little curious to the legality of that from foreign car companies. The Indonesian financial system is very unfriendly to foreign companies participating and is heavily regulated for them.

Thank you for the explanation. I am used to nominal vs. effective interest rates, but what I was used to just broke down on compounding monthly vs annually. I never saw upfronting 100% of the interest into the loan and paying monthly on that. I was seeing quotes as low as 3% year 1 from private banks, but then 4.25% year 4.

BCA

Bunga Mobil Baru - BCA Finance

bcafinance.co.id

So on a 100 juta loan that would be 3 juta yr 1, 3.5 juta yr 2, 3.75 juta year 3, and 4.25 juta year 4 all front ended into the loan for a total of 114.5 juta /48 or 2.385416 juta per bulan. This is still only an effective 6.801%. How can that be? The current Indonesian government 10 yr bond has a yield of 6.467%. There should be more of a default premium built than just .33% into a car loan.

The used car rates seem more appropriate:

Bunga Mobil Bekas - BCA Finance

bcafinance.co.id

9% nominal becomes an effective rate of 16% which seems more likely with default risk, costs, and inflation risk for Indonesia.

Does anyone know why the insurance rate is so high for Sumatra?

Does the insurance premium go to the bank as a self-insurance portfolio rate or is it a separate third party? Government or private?

At 4.2% upfront on a 100 juta loan in Sumatra, that would put the effective rate to 8.583% for the bank and more reasonable.

 

[pantaiema]

It seems this is the common way the car loan / leasing is calculated in Indonesia. So it is different to people common understanding of APR (Nominal interest Rate) and AER (Effective interest Rate). Also as mentioned previously, it does not take into account of the reducing balance every time the monthly payment is made.

Cara Hitung Kredit Mobil Sesuai Kebutuhan dan Simulasinya

Cara hitung kredit mobil yang sesuai dengan kebutuhan dimulai dengan menghitung DP, besaran pokok kredit, suku bunga, biaya asuransi…

otoklix.com

In this example:
Car Price Rp700m, Interest of 6% pa DP 20%, 3years (automatically converted to 36 months).
All of the insurance, admin fees and region is deliberately set to Rp0 (0%) so it could be easily compared. But in reality this will still need to be added to the loan.
DP 20% of Rp700m=Rp140m,
So Credit Loan= Rp700m-Rp140m=Rp560m
Interest rate per year is 6%, so 6% x Rp560m = Rp33,6m per year
So for three years multiplied by three =3xRp33,6m= Rp100,8m
Calculated Monthly Re-Payment
(Rp560m + Rp100,8m) / (3x12) = Rp18,35m per month

It is the same result with credit simulation calculator available for public in Indonesia

Simulasi Kredit Mobil / Pinjaman Kendaraan

Simulasikan kredit mobil anda di sini. Anda dapat mencari harga yang pas buat kantong anda dengan simulasi pinjaman mobil ini.

www.simulasikredit.com

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As mentioned previosly the way the Interest of the loan, monthly repayment in Indonesia is caculcated is quite different as they do not take into account the reducing balance of each monthky repayment beeing made. This interest is appplied to the Inital Pricinpal loan thorugh the whoike duration of loan, in this case this three years. So 6% headlines mentioned above is not a proper APR that common people understand when taking the loan in the developed worlds.

I recalculate using a proper APR equivalent of this Rp18,35m monthly repayment of Rp560m loan, it comes close to mentioned by "Centurian" as above e.g 11.60% using proper APR term that you normally see when taking the loan leasing in developed world.

For Rp560m, 3- years term with 6% interest using a proper APR the monthly repayment should only be Rp17m (not Rp18.35m)

Hopefully all of the lenders in Indonesia is using the same method, when calcucalting the monthly repayment. If there is no standard than the quoted headline rate is usless and can not be used to compare with oher deals.

 

[jukung11]

Yes Pantaiema. I read your and centurion's responses. I appreciate them. I used the same methodology for my calculations. The 3.625% average nominal interest currently advertised by BCA for this month becomes a 6.801% effective interest (6.792% using the calculator you posted). Feel free to check my math. It still seems too cheap of an interest rate compared to government rate. I can't imagine any risk to government bonds would not be equal or greater for new auto loans. Do you have any insight into this or any of the other questions?

 

[snpark]

You think too much
Keep your money in the bank and pay by finance

End of

 

[flavus]

I am used to nominal vs. effective interest rates

Whereas I am not. Thank you for all the examples from everyone, it finally clicked through that the interest is always applied to the whole loan, without the principal slowly dwindling like I am used to!

 

[centurion]

Yes Pantaiema. I read your and centurion's responses. I appreciate them. I used the same methodology for my calculations. The 3.625% average nominal interest currently advertised by BCA for this month becomes a 6.801% effective interest (6.792% using the calculator you posted). Feel free to check my math. It still seems too cheap of an interest rate compared to government rate. I can't imagine any risk to government bonds would not be equal or greater for new auto loans. Do you have any insight into this or any of the other questions?

BCA is a big bank. They can even take money from Bank Indonesia at a repo rate of 5.75% (now, and before was much less) and still make a margin. They can also utilize the money from their customers' deposits where they pay 4% per year maximum. Be aware that almost nobody takes a 1 -a year car loan, but usually is 4-6 years, where the interest rate goes much up or floating. Also, the loan includes the % for processing the loan (1%).

 

[snpark]

BCA is a big bank. They can even take money from Bank Indonesia at a repo rate of 5.75% (now, and before was much less) and still make a margin. They can also utilize the money from their customers' deposits where they pay 4% per year maximum. Be aware that almost nobody takes a 1 -a year car loan, but usually is 4-6 years, where the interest rate goes much up or floating. Also, the loan includes the % for processing the loan (1%).

And for repay early also a "penalty" lol

 

[Samoerai]

How can that be? The current Indonesian government 10 yr bond has a yield of 6.467%.

As far as I know a bank (let's say A) can borrow money from another bank (B), not only from the central bank . So, this bank A, making a good deal with bank B, could lend money to consumers with a lower interest rate than the market rate.

So on a 100 juta loan that would be 3 juta yr 1, 3.5 juta yr 2, 3.75 juta year 3, and 4.25 juta year 4 all front ended into the loan for a total of 114.5 juta /48 or 2.385416 juta per bulan. This is still only an effective 6.801%.

As I understand Centurion's explanation, this calculation is wrong.

Reading the BCA's ad "Bunga Mobil Baru Bulan Juni", one has a choice in the duration of the car loan. Let's say one chooses a car loan with a term/duration of 3 years, the interest is 3,75%.

Your calculation is regarding a car loan with a duration of 4 years and paying a 3% interest rate in the first year, 3,5% in the second year etc.

That's why Centurion is warning "Be aware that almost nobody takes a 1 -a year car loan, but usually is 4-6 years,".

But, correct me if I am mistaken .. my first language is not English, so hard to understand sometimes the posts of native English speaking people.

 

[pantaiema]

Early Repayment Charge (ERC) is not unfair. Keep in mind if you could pay early they will forfeit any potential profit that they could get. Not to mention opportunity cost by let the money tied to you. Put it on your own shoes, if someone takes a secure loan from you with reasonably high interest rate and suddenly they want to clear all of the balance just because they have money. Are you going to accept that, losing potential profit from interest? They might do that if you also compensate their unrealised profit that thy have forfeited due to early repayment. Also consider the opportunity cost that you might suffer.

If you take secure loan in developed world such as mortgage you could only make additional payment within a certain percentage of the remaining balance, typical no larger than 10%. Paying more early it will trigger the ERC. Unless it is stated otherwise the ERC is a default of any reputable mortgage lenders in the developed worlds with a good regulators and watchdog.s

The Indonesian way of calculating the monthly repayment is typically not acceptable in any developed world. If they did they will need to state the equivalent proper calculation using APR with the dwindled balance, e.g. the constantly reduced balance every time you make the monthly repayment. Doing this people could easily compare it with other deal out there.

Just Imagine, with the example above you would have thought you get a bargain, a good deal of 6% APR but the APR is actually 11.6% if it is calculated properly in using the dwindling balance.

 

[jukung11]

BCA is a big bank. They can even take money from Bank Indonesia at a repo rate of 5.75% (now, and before was much less) and still make a margin. They can also utilize the money from their customers' deposits where they pay 4% per year maximum. Be aware that almost nobody takes a 1 -a year car loan, but usually is 4-6 years, where the interest rate goes much up or floating. Also, the loan includes the % for processing the loan (1%).

That's the information I was looking for. I couldn't find anything on loan origination fees.

My suspicion is there is no truth in advertising enforcement in Indonesia. My guess is the people that get the advertised rate are likely insiders or people in powerful positions. I can't find the article, but I read last night that the average car loan in Indonesia is 6.05%. On a 5 year loan, that would be an effective 11.265% rate. That makes more sense now.

I never stated anything about a 1 year loan. All my calculations are a 4 year loan.

As I understand Centurion's explanation, this calculation is wrong.

The calculation is based on the BCA advertisement on the link I posted. They advertised different interest rates per year. I added them up and loaded them into the total loan the same as the article does. It just takes manual calculation instead of a calculator. If you want to use the calculator, you add up the 4 years interest rate and average them (3.625%). The time-value of money calculation doesn't matter because the bank front loads all interest into the loan. I believe the calculation is correct.

Early Repayment Charge (ERC) is not unfair. Keep in mind if you could pay early they will forefeit any potentail profit that they could get.

It depends. There is no return without risk. Only if a borrower becomes a lower risk and pays off a loan or in a falling interest rate environment is there lost profits.

Early repayment can be beneficial from both a financial institution stand point and public policy standpoint. Typically, most financial institutions charge a loan origination fee. Centurion states that this is the case even in Indonesia. An early repayment means more money to lend out for a new loan to generate a new fee. The financial institution now has a potential new customer too. A credit worthy customer that just paid the financial institution back in full. In a rising interest rate world, current loans are no longer at market rate. A new loan also increases a financial institutions profits.

From a public policy standpoint, the central bank wants the opposite of financial institutions. When interest rates are rising, banks want to get lower interest rates off their balance sheets and get that money back in the door to lend out at higher interest rates. Central banks are trying to curtail lending to slow down inflation. When interest rates are falling, central banks want more people borrowing to stimulate the economy. Banks are making more profit on their current loans, but a borrower that pays back early can create a new loan for a greater amount with the lower interest.

Early repayment is in the best interest of banks in a rising interest rate environment and central banks in a lowering interest rate environment.

 

[snpark]

 

[snpark]

Obviously a typo for 1 year 500jt

 

[Samoerai]

The time-value of money calculation doesn't matter because the bank front loads all interest into the loan. I believe the calculation is correct.

According to my calculation based on the "The Indonesian way of calculating the monthly repayment" explained by Centurion and inputting the BCA advertisement regarding a 4 year car loan (100 juta) with 4,25% interest, the effective Interest rate would be 8,2%.

Point is, the interest rates for car loans here in Indonesia, have to be taken with a grain of salt.

 

[Samoerai]

Obviously a typo for 1 year 500jt

Lack of sleep ..

 

[pantaiema]

According to my calculation based on the "The Indonesian way of calculating the monthly repayment" explained by Centurion and inputting the BCA advertisement regarding a 4 year car loan (100 juta) with 4,25% interest, the effective Interest rate would be 8,2%.

Point is, the interest rates for car loans here in Indonesia, has to be taken with a grain of salt.

Based on my calculation:
Rp 100m 4.25% Interest, 4 Year Tenure. All of other fees, insurance, admin, region, etc is removed (set to zero) to allow meaningful comparison.

-Indonesian way for car loan calculation, the monthly repayment will be around Rp 2.437.500,00

- Using a proper way taking into account the fact that your balance is reducing every single month when you make the monthly repayment, like what you get when taking a mortgage, the monthly repayment should only be around Rp 2,269,110.00

Comparing both the effective interest you are paying taking into account the dwindling balance every single month, based on my estimation, it is actually equivalent to around 8%. So the difference is almost double.

 

[pantaiema]

I was aware of loss leaders and financing from car companies to increase sales. My question was looking for private banks. The answers about car company financing now has me a little curious to the legality of that from foreign car companies. The Indonesian financial system is very unfriendly to foreign companies participating and is heavily regulated for them.

Thank you for the explanation. I am used to nominal vs. effective interest rates, but what I was used to just broke down on compounding monthly vs annually. I never saw upfronting 100% of the interest into the loan and paying monthly on that. I was seeing quotes as low as 3% year 1 from private banks, but then 4.25% year 4.

BCA

Bunga Mobil Baru - BCA Finance

bcafinance.co.id

So on a 100 juta loan that would be 3 juta yr 1, 3.5 juta yr 2, 3.75 juta year 3, and 4.25 juta year 4 all front ended into the loan for a total of 114.5 juta /48 or 2.385416 juta per bulan. This is still only an effective 6.801%. How can that be? The current Indonesian government 10 yr bond has a yield of 6.467%. There should be more of a default premium built than just .33% into a car loan.

The used car rates seem more appropriate:

Bunga Mobil Bekas - BCA Finance

bcafinance.co.id

9% nominal becomes an effective rate of 16% which seems more likely with default risk, costs, and inflation risk for Indonesia.

Does anyone know why the insurance rate is so high for Sumatra?

Does the insurance premium go to the bank as a self-insurance portfolio rate or is it a separate third party? Government or private?

At 4.2% upfront on a 100 juta loan in Sumatra, that would put the effective rate to 8.583% for the bank and more reasonable.

I have not thought thoroughly, but I think why you ended up here with a smaller figure e.g 6.801%, is you do not take into account the fact that your balance is reducing every single month, not every year. With 48 months to account for the difference could be meaningful.
When you save your money into the bank, many savings, especially easy access savings the interest calculation it is not even monthly but daily. It is daily compounded from the balance you have by the end of the working hours on that day.

 

[flavus]

If you take secure loan in developed world such as mortgage you could only make additional payment within a certain percentage of the remaining balance, typical no larger than 10%

This might vary by country. In the US honeowners who move houses will typically pay off the original mortgage with the sale proceeds of their old house, so ... early payment penalties are regulated. Apparently it's more common during the first five years (US mortgages are typically 15 or 30 years with the rate locked in - even the floating rate - this is not common elsewhere; the government really pushes people towards home ownership)

IIRC in car financing early payment penalty is rare too. But it's more common when you lease (since then there is the added burden of them having to take in the car early and try to sell it)

Can I be charged a penalty for paying off my mortgage early? | Consumer Financial Protection Bureau

Whether you can be charged a penalty for paying off your mortgage early depends on what type of mortgage you have and the specific terms of your mortgage loan.

www.consumerfinance.gov

 

[pantaiema]

This might vary by country. In the US honeowners who move houses will typically pay off the original mortgage with the sale proceeds of their old house, so ... early payment penalties are regulated.

I never say you can not pay off your mortgage, I said the default is you can not pay off your mortgage without triggering the Early repayment charge (ERC). Certainly this ERC will depend on the TCs.
The 10% maximum is the typical figure (depending on the TCs) of an overpayment allowance, each year without triggering the ERC fees.

 

[flavus]

I never say you can not pay off your mortgage, I said the default is you can not pay off your mortgage without triggering the Early repayment charge (ERC). Certainly this ERC will depend on the TCs.
The 10% maximum is the typical figure (depending on the TCs) of an overpayment allowance, each year without triggering the ERC fees.

Sure. I am just saying that in at least the US the ERC is in practice very constrained or don't exist.