MORE consumers are shifting away from purchasing used vehicles amidst rising interest rates on motor vehicle loans.

Motor vehicle sales fell drastically in the heights of the pandemic before showing some level of resurgence in 2022. But sales in the used car market are still not tracking at pre-COVID-19 levels, causing jitters among used car dealers that they might be on the bumpy ride longer than anticipated.

The used car dealers are up against a new challenge — rising interest rates on car loans — which, in addition to declining revenues, comes with the blowback of high inventory costs.

“Sales have been particularly slower this year. People are still catching up on mortgages and car loans since COVID, but things have gotten worse with the high interest rates…that’s the primary issue,” vice-president of the Used Car Dealers Association and CEO of Carland Investments, Tariq Malik, told the Jamaica Observer.

“On the other side, the banks are showing favouritism towards new cars, and they are hooking people on loans that span eight to 10 years. People are innocent, they are only looking at monthly payments and not the long-term effect as well as the depreciation of the car when they finally clear the loan,” he continued.

It all started in late 2021 when the Bank of Jamaica (BOJ) started raising its policy rate, which is the overnight rate that the central bank applies to funds it holds for deposit-taking institutions.

Two years ago, the policy rate was 2.50 per cent but has climbed to 7 per cent today as the central bank works to keep the cost of goods and services from skyrocketing. Still, the cost of borrowing has elevated and between late 2021 and mid-2022 the banks took a stance to increase interest rates on their loan products to cover some of the additional expenses. The changes would impact both new and existing loans.

The loan rate for a new car now hovers at 8 per cent per annum, up from 6 per cent pre-COVID-19, while an individual purchasing a car three years and older will pay somewhere between 10 and 18 per cent per annum.

New car dealer ATL Automotive is completing this year strong, as sales soared for the second consecutive year largely on increased demand for the fast-growing Kia brand. The brand is said to be the second-best seller locally.

Group marketing manager at ATL Automotive, Christina Taylor, said that while the rise in interest rates was forecast to negatively impact car sales, several factors have played into vehicle sales trending upwards.

“The increase in the local employment rate improved loan accessibility. Additionally, auto brands globally continue to improve on the features of the vehicles while maintaining an attractive price point,” Taylor told the Caribbean Business Report.

She added that lower interest rates on new vehicles like Kia would make one to three-year-old cars more attractive since the monthly repayment would be on par with the repayment for a used car with lower maintenance issues.

“Plus the new car usually comes with a 5-year manufacturer’s warranty,” Taylor said.

Used car dealers are having the opposite experience, with some quoting year-on-year declines as high as 50 per cent.

The performance has fed into decisions by some used car dealers to discount vehicle prices by up to $1 million in hopes of offloading some of their stock before the close of the year.

In the motor vehicle industry, the rule of thumb is that a new car will lose approximately 20 per cent of its value in the first year and 15 per cent each year after, so every December car dealers are typically in a scurry to minimise their inventory.

But this year the deals are heavier in the used car market, and the auto dealers are keeping their doors open longer to woo potential buyers.

“We are up against different things happening in the industry. Interest rates are going up and there is also increased competition from those operating formally and informally in the industry,” CEO of Jetcon, Andrew Jackson, told the Caribbean Business Report.

Jetcon’s results are public, and over the nine-month period January to September sales dipped by nearly 40 per cent, from $807 million to $508 million. The poor sales out-turn pushed the company into losses of $12 million for the first nine months of its financial year. Figures for the full year 2023 will not be publicly available until between January and mid-February 2024.

“It’s bad, our sales now are worse than during COVID,” Jackson said.

Founder of Superlative Auto, Delrick Pinto, confirmed that the used auto company has also seen a dip in sales year on year, albeit not as steep as that of competitor, Jetcon. Pinto pointed to rising interest rates as one of the strongest factors for the decline in sales, but added that customers are also growing weary of administrative challenges at some financial institutions, causing them to cancel purchases.

“The approval process is taking much longer at some of the banks. It could be a mix of understaffing or added steps in the approval process. What we are certain about is that the speed at which they are signing off on the documents is affecting our business,” Pinto said.

Data requested from the National Commercial Bank (NCB) by the Caribbean Business Report showed that the bank experienced marginally higher growth in the number of auto loans for new cars than it did for used cars when compared to 2022.

“The average value per loan for new cars increased from $6.9 million to $7.4 million year on year, while the average value per loan for used cars increased from $1.9 million to $2.3 million year on year,” NCB said.

But even without the official data, Jetcon’s owner was already convinced that his company needed to pivot if it wanted to stay in business.

The company has been quietly testing new cars as it looks to tweak its business model to include the sale of new vehicles. Jetcon has been testing a Chinese auto brand, Beijing X55, a small SUV which carries specs similar to the Honda CRV, the Corolla Cross, and the Suzuki Vitara. It’s made by Beijing Automotive Industry Corporation.

Jetcon has already sold all units from the first shipment of Beijing X55. Two other shipments are on the way.

Jackson says Jetcon will also be testing out another Chinese brand, the Blaval — a subcompact the size of a Toyota Vitz — between now and the first quarter of 2024.