Thursday, December 4, 2008

Actual Local Investigative Journalism - Legal limits on Car loans avoided.

I stumbled across this rather hidden actual Omani Media Investigative Journalism piece in.... Times of Oman. Yes. A story on car loans.

Read between the lines, and the story is that while the Central Bank have decreed that all car loans are to be for a maximum of 80% of the car value and the remaining 20% paid by the customer, dealers are getting around it by simply 'over invoicing' on the value of the car, enabling customers to effectively borrow 90% or more from their banks and flaunt the intent of the CBO's law.

Loopholes are a common problem in Omani law, especially as the lack of either personal income tax or VAT means a lot of the economy is uncontrolled and not easy to police. But it isn't hard to make this sort of transaction even more legal.

For example, I could actually charge you full price, but then offer an instant cash rebate, free gifts (that can be exchanged for cash), and include insurance, 'free' servicing, etc.

It is an example of how these simple 'micro-managing type' laws are often by-passed almost immediately. People are just too damn clever to easily be made to do something they don't want to do, especially when there's a buck in it.

Excellent work, Aftab H. Kola. This is good to see. More please!!!!!!
[Essa, Bonus?]

Is CBO regulation putting a spoke in car sales through finance?

Aftab H. Kola
Times of Oman, Wednesday, December 03, 2008

MUSCAT — One of the key sectors in Oman — the auto finance industry — faced fluctuations in fortune this year following a new regulation from the Central Bank of Oman (CBO).

It may be recalled that the CBO in the beginning of the year had issued circulars to all financial companies that a borrower who wants to buy a car through loans should pay a minimum of 20 per cent down payment of the cost of the vehicle.

CBO instructed that personal loans for purchasing of vehicles have been mounting significantly and with a view to improve prudence and moderation the step was necessitated.

Cars in Oman have been within the close reach of consumers due to easy instalment schemes offered by auto finance companies. In fact, industry sources attribute this success of auto companies to the effectiveness of their alliances with financing institutions. The increased preference for financing car purchases through loans, thus, seemed justified.

According to reliable industry sources, out of 30,000-odd cars sold in Oman every year, 65 per cent are through finance. Says Aftab Patel, CEO, Al Omaniya Financial Services, “The down payment rule is applicable to individuals and not for corporate or business buying. There has not been a significant demand reduction in car sales through finance as the consumers have taken it in a positive spirit. If you look at the other way, instalments will come down.”

Another official from a car finance company said: “Smart money managers who make a 20 per cent down payment have more freedom to make a change in the car they drive. During the second year, when the car depreciates at a much slower rate, they would begin to build equity in their car. During a trade-in, they would actually get a positive credit towards the new car.”

Major players in retail car financing refused to comment on how the CBO rule has affected the car finance market. However, Mohammed Nazim, deputy general manager credit and collection, Suhail Bahwan Automobiles is candid: “The down payment rule has affected the car market marginally, but people are just crazy about cars here.”

Another official from one of the leading finance companies frankly admits that the car sales have been affected to a fairly good extent. He observed: “It is extremely difficult for new employees to pay 20 per cent down payment.”

But reports suggest that some car dealers who have in-house finance schemes are offering car loans without sticking to 20 per cent down payment. They charge less than 10 per cent down payment.

Consumers like Mohammed Hisham, a government employee find it extremely difficult to shell out a big initial amount to buy a car on finance.

He says: “The down payment component is important to a low-salaried man like me. I just got a licence and I’m keen to buy a car. But I don’t think I can buy one if they insist on 20 per cent.”

There are many like Hisham who echoed similar views. Then there are some smart agencies who know how not to send away a potential buyer either by ‘over-invoicing’ or ‘trade-in’ tricks. Industry experts now feel that the future of the automobile sector is now directly linked to the ever-increasing youth population, which is the prime target segment for most of the dealers.

And so they are devising some new schemes so that down payment does not deter them from buying cars.

Naughty naughty...


  1. I actually was wondering, how is one's credit-worthiness determined in Oman? More importantly - how do I qualify for the bestest rate on a car loan?

  2. Forget about new schemes to beat the 20% down payment requirement. The bigger scandal is the way some of the larger car showrooms force deals to be structured to the detriment of customers.

    One of the large dealers asks all finance companies to have a common lending rate to customers so there is no price war that spills over to customers. However, they strike deals with the finance companies to charge less by 1-2% and pocket the difference. So far so good. But the finance companies don’t want to take this as an expense. So they add this fee to the loan amount and book a higher loan in the customers name. The customer remains unaffected if he runs the loan through the tenor completely since his installment remains the same. However many customers foreclose to buy new cars or consolidate loans through banks. They don’t realize that the outstanding that they pay includes a portion of this fee that is paid to the dealer which is close 8% on the balance of the loan. The only ones who realize are the ones who foreclose in the first few months and are shocked to find that the loan outstanding is greater than the loan amount they originally took. These are managed by the finance company and the dealer by giving ‘rebates’ to customers.

    Dealers like this cozy relationship so much that they insist on not creating a hypothecation on the car, even if it is financed by someone. That way, they ensure that the financier if he wants a hypothecation is forced to pay the fee. And as a consequence of this, customers don’t get lower interest loans directly from finance companies and other banks!

  3. So essentially what you're saying is that a customer should negotiate the car price and the loan terms for the purchase independent of each other and with separate entities?

  4. Not all dealers are like that. When we got my wife's car this past summer we decided to take finance from the bank instead of a finance company. I got a really good interest rate from the bank and then managed to get the dealer to give a big discount on the list price. I asked the dealer if they would give me an invoice on the list price if I want to reduce my my participation. They refused. They gave the invoice for the discounted price and I paid 20% with the bank kicking in the other 80%. I was really impressed.

    The worst dealer when it comes to auto finance is Bahwan. They refuse to quote a price on their cars unless they know how you will finance it. And if you want lease finance they will dictate which finance company you can go to. They do not have a one price for all policy. You cannot simply negotiate the lowest possible cash price and then take that price to a finance company.

  5. its simple the dealer will stop advertising with Times Of Oman, they will be forced to chill and write rosy stuff about the dealer...

    Its happned before

  6. Bahwan were a nightmare to deal with. So much so that I decided not to buy with them.

    In the end, I managed to pay only 3% down payment on a vehicle and financed 97% of it.

    In hindsight - having watched the depreciation, and the massive charges on the finance deal, I will never buy a new car again.

    Year Ones for me all the way now.



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