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Customers change habits in car finance

While the financial crisis only seems to have had a short-term impact on car purchases, there is one area in which it has had an impact, namely customers’ approaches to car finance.

In the heady days of the boom time, people wanting to buy a car would typically borrow the entire amount from the bank, a Bank of Cyprus official told the Cyprus Weekly.

Now, however, that is changing, as the banks give incentives for people to finance part of the purchase themselves.

“After the crisis, no one was buying,” the official told the Cyprus Weekly.

“Then the ones who did have money would buy in cash. And now we are seeing people putting down 20%, 30% or 40% and topping up the rest with a loan. This sector is getting bigger and bigger.”

One of the reasons for buyers making downpayments is that it makes a big difference to the cost of the loan.

For a 50% contribution on a new car, for example, the interest rate starts at 4.39% and rises to 5%, the bank official explained.

On the other hand, if the contribution is only 35%, the interest rate starts at 5.14%.

Loans for second-hand cars are also more costly, because they depreciate faster.

For a 50% down-payment on a used car, the interest rates starts at 5.14%, while if you only put down 35%, it will start at 6.14%.

Another change in finance is the greater use of regular loans instead of flat-rate loans.

A flat-rate loan means you pay all the interest upfront and only after that is paid do you start reducing the value of the original loan.

With a regular loan, on the other hand, you pay interest and capital at the same time.

Since the value of your loan starts to fall from the first payment, your interest rates (other things being equal) will also fall over time.

This also makes a difference to effective interest rates.

“For a flat-rate loan they might say the interest rate is 2.5% but because of the flat rate the annual percentage rate (APR) is 4.7%,” said the official

This makes it similar to a flat-rate loan, where a loan quoted at 4.5% has an APR of around 4.7%.

The down-payments from customers (as well as repayments of non-performing loans) may explain why the total stock of consumer credit is still declining for the banking system as a whole.

The stock of outstanding consumer credit fell year on year by 2.7% in the first quarter to €2.8bn, although the pace of decline is much smaller than in 2014.

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