Since the State Bank began loosening monetary policy, slashing rates in half from a peak of 22 percent to the current 11 percent, auto financing has staged a comeback, but in an unexpected way. Borrowing has grown despite rates not returning to their historic lows and despite car prices nearly doubling since 2021.
On average, banks are now lending about Rs7.3 billion a month in auto loans, almost matching the levels seen when rates were at 7 percent. But unlike in 2021, every rupee of borrowing today is stretched further: buyers are taking out bigger loans per vehicle, yet these cover a much smaller share of the car’s cost.
While the surge in auto borrowing may indicate to some a great movement in demand and the credit market, what it really represents is the weight of higher prices and much tighter regulations.
Average net borrowing for car loans over the last eight months (Jan-25 to Aug-25), since the year began, stands at more than Rs 7 billion.During this time, policy rate reduced from 13 percent to 11 percent, holding steady at this latest rate for the past four months. The average rate during this period therefore is 11.5 percent. Compare this to when rates were at their all-time low at 7 percent.
In June of 2020, the Monetary Policy Committee cut the rates to 7 percent from 8 percent. This is where policy rate remained for 15 months.
During this period, the average net borrowing for auto loans stood at Rs7.5 billion; only slightly higher than it is during the current cycle in 2025. Making this a period-period comparison, between Jan-21 and Aug-21, the average net borrowing stood at Rs8.6 billion. Crucially, by this time, rates had already hit their lowest yet for seven months.
Expand this picture to demand. In the former period (Jan-21 to Aug-21), with rates at 7 percent, average monthly sales for passenger cars, LCVs and SUVs were about 18,500. Recall that at this point, there were no restrictions on car financing. Imported vehicles could also get car loans.
The economy was performing really well, though macroeconomic pressures had begun to mount in the latter months. Turning the clock to present day, the economy is still very much in a cautiously expanding phase; production and incomes are not rising fast enough, households are still feeling the reverberations from the shocking past years of crippling inflation and tax burdens have increased.
The SBP has been cutting rates with reservations. The regulator is not willing to let completely loose and face unbounded growth, and import-led pressures.
Therefore, for the past eight months (Jan-25 to Aug-25, the latest available data), while automotive demand has resurfaced, it is still on a slow mend. The average monthly sales stands at 14,000 units. The average rates during this period stand at 11.5 percent and as earlier stated, the average net borrowing is Rs7.3 billion.
The policy rate is a clear driver of the auto loans cycles, which explains the growing in borrowing as well as demand.
However, the SBP-mandated restrictions on car financing that have tightened regulations across tenor and equity with outright bans on loans for imported cars means the current net borrowing is entirely being absorbed by the domestic market. The market is operating in a tougher regulatory environment, with higher rates and yet they are showing robust growth.
The net borrowing per vehicle when rates were 7 percent compared to now when rates are 11.5 percent has gone up by 11 percent. This could be because of the sharp rise in prices and that buyers are now borrowing more per unit than before.
However, the auto financing intensity seems to be steeper than before. Obviously, not all the cars are being financed. If roughly 30-40 percent of current sales are being financed through banks, and the rest are being funded with cash, the financing intensity in 2025 is even greater now than when rates were at their lowest.
Because cars are more expensive, and demand has remained subdued for a good period of time, buyers are returning to the market faster than they probably should, paying a higher amount out of pocket to fulfil their needs.
Let’s add a last bit of nuance here, given that we don’t know the number of borrowers that banks are loaning to or average loan sizes. We bring in the average car prices into the equation. Between sedans and smaller engines such as Alto, the average weighted price would be around Rs3 million. For the same models, the average weighted price would be Rs5.5 million or slightly higher.
The loan to value ratio between 2021 and 2025 has fallen from 52 percent to 32 percent. This means that while borrowers are taking out bigger loans, these cover a smaller share of the total car price, forcing buyers to shoulder much larger upfront payments.
The decline in relative financing suggests that tighter lending rules, shorter loan tenures, and sharp price inflation haveoutpaced the capacity or willingness of banks to extend credit. This also implies thatcurrent auto financing is only “deeper per borrower” but not nearly as effective in bridging the affordability gap or sustaining a vibrant market as it might appear.
The fact is, while the SBP’s cautious loosening has revived auto financing, it is only fueling a fragile recovery that may not hold if incomes fail to catch up. But perhaps, in order to keep imports and massive demand in check, this fragilityplays right into SBP’s playbooks. With perhaps, consumers as the only likely losers.
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