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. Last Updated: 07/27/2016

Credit Plans Help Fuel Demand

MTDealers are reporting that as many as 30 percent of car sales are financed by loans.
The traditional Russian way of buying a car -- walking into a dealership with a bagful of $10,000 worth of hard-saved rubles -- may be about to change, as a range of newly minted credit plans offer a quicker way to get behind the wheel.

Carmakers, dealerships and banks have caught on to the idea that selling automobiles on credit not only makes a range of cars available to people who could not afford them before, but that it can be profitable for lenders, too.

Some dealerships are reporting that as many 30 percent of the cars they sell today are at least partially financed by consumer loans -- an astonishing leap.

"Two years ago, the business didn't exist," said Kirill Chuiko, an analyst with UralSib.

Rising incomes are a part of the change, but it is a new stability in the economy that has given consumers confidence that they will have future earnings to pay back drawn-out credit plans.

Potential car buyers who do not have the means to shell out thousands of dollars at once are glad there is an opportunity to take out a loan paid back over two to three years, Chuiko said. However, the market's immaturity means banks find working with individuals risky, and interest rates are high.

Banks will finance car purchases with anywhere from 5 percent to 20 percent interest, but in most cases rates hover at the top of the range. In the United States, by comparison, consumers can get car loans for free or at interest rates that start behind the decimal point.

One of the leading consumer lending banks, Russky Standart, advertises car loans on its web site at 19 percent interest, payable over two years -- plus a hefty 1.9 percent commission.

Chuiko said rates should fall as banks acquire more experience and new market players from abroad come in with competitive rates. "A typical loan lasts three years, but banks haven't had time to complete the first cycle yet, so they are still very cautious," he said.

With the market so new, overall figures are hard to come by. But according to, a web site dedicated to helping consumers find the right auto credit deal, banks loaned nearly $160 million in one- to three-year consumer loans -- the time frame most car loans fit into -- in the first half of 2003, compared to $92 million in the second half of 2002.

One of Moscow's bigger auto dealerships, Rolf, has experienced a boom in car sales on credit. Today 21 percent of its sales are at least partially financed through credit, said the company's president and CEO, Matt Donnelly. With some models the proportion is even higher. Nearly 40 percent of the Russian-built Ford Focuses Rolf sells are financed through credit thanks to a cheap financing program -- 5 percent interest -- that the U.S. auto giant has in place.

Most sales on credit are in the lower end of the market, as those interested in luxury cars generally do not need loans. "They can afford to buy two cars with cash on the spot," Donnelly said.

Lending is one of the engines driving demand for cars. For dealerships like Rolf, it means those who would have opted for a used foreign car two years ago are now ready to buy automobiles straight off the showroom floor.

Rolf has plans to launch its own national credit program with Gazprombank, and although at 10 percent interest it will be twice as expensive as the Ford program, Donnelly believes it will be successful in the regions, where the lowest credit available is about 13 percent.

Credit rates have traditionally been higher in the regions, where banks have considered operation to be less profitable. But attitudes are slowly changing, Chuiko said.

The share of credit in the car business could grow if the right infrastructure were in place, Donnelly said. "It's still massively painful. There aren't any credit rating systems," he said. "As long as you have a job, you're not likely to get turned down."