Dry-Funded Female Warrior... Demarketing Even Interest-Free Installments and Car Loans

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] Specialized credit finance companies, whose funding sources have dried up due to base interest rate hikes and credit crunches, are engaging in demarketing?intentionally reducing customer demand. Card companies are cutting back on no-interest installment benefits that they had been competitively expanding, while capital companies are also scaling down their core business of auto installment financing, marking the start of full-scale tightening.

According to the financial sector on the 20th, Shinhan Card reduced the no-interest installment period offered for online shopping and non-life insurance from 6 months to 3 months this month. Samsung Card also cut the no-interest installment benefits provided at large supermarkets from 6 months to 3 months, and Hyundai Card reduced the 12-month no-interest installment benefit offered for Hyundai vehicle purchases to 3 months.

Card companies, which had been expecting a consumption boost following the lifting of COVID-19 social distancing measures earlier this year, are now engaging in demarketing by reducing benefits because funding sources have dried up due to soaring interest rates and bond market tightening. According to the Korea Financial Investment Association’s Bond Information Center, the 3-year card bond AA+ (Shinhan, Samsung, KB Kookmin Card) yield rose by more than 300 basis points (1bp=0.01%) compared to the beginning of the year, reaching 5.871%. The 3-year card bond yield once rose to around 6.2%, but it has somewhat declined since the bond market stabilization fund began purchasing asset-backed securities.

An industry insider said, "Card companies, which do not have deposit functions, have recently turned to long-term commercial paper (CP) or asset-backed securities (ABS), but they still raise 60-70% of necessary funds through bonds. While bond yields have risen excessively, the maximum interest rate they can charge is limited by regulations, so to defend against negative margins, they have no choice but to intentionally reduce marketing."

Capital companies are also engaging in demarketing in their core auto installment financing sector. Due to their relatively lower credit ratings, capital companies face more difficulties issuing bonds compared to card companies. According to the Credit Finance Association, assuming a purchase of Hyundai Motor’s Grandeur?the top-selling model in the domestic finished car market last year?with a 30% down payment and a 60-month installment period, Hyundai Capital, affiliated with Hyundai Motor and Kia, offers interest rates ranging from a minimum of 4.2% to a maximum of 9.0%. Considering that the average actual interest rate last quarter was only 3.61%, this represents a significant increase.

The situation is even worse for capital companies outside of bank-affiliated or large conglomerate groups. Some companies have stopped handling new auto loans and are focusing on recovering existing loans. A representative from a small to medium-sized capital company explained, "Since bond refinancing is not possible, it is difficult to generate new business not only in corporate finance but also in stable auto installment financing. Currently, more companies are deciding that it is better to focus on recovering and repaying existing loans until the bond market stabilizes."

This content was produced with the assistance of AI translation services.