For some time now, I have been struck by the quantity and quality of the cars we see on the streets of Santiago the quantity and quality of the cars that we see in daily circulation in the streets of Santiago, especially considering the cost of new cars, whatever the segment in which one is interested. For example, a Toyota Yaris today costs from $13.490.000, being that the average salary in Chile is $757.752, ie, an entry-level model is equivalent to 17 salaries. This figure is even more striking if we look at the new car market in Chile, which closed 2023 with 313,865 new units sold. By way of comparison, 449,438 new units were sold in Argentina, a country with a much more developed domestic automotive industry and at least twice as many inhabitants.

Could it be that cars are indeed much more expensive than they were 10 years ago?

In comparative terms, in Chile an average car costs US$22,000 and an average house costs approximately US$245,000, i.e. a house costs 11 cars.that is, a house costs 11 cars. If we do this same exercise in 2014, an average car cost 16,000 USD and an average house cost 180,000 USD, the same 11 cars.

In the United States, the number is quite similar: the average car costs $48,000 USD when the average house costs $420,000 USD, i.e., a house costs 9 cars in simple terms.that is, a house costs 9 cars in simple terms.

If we look at this graph, where we review the average price of new cars in pesos (CLP) v/s inflation, we see how there was a significant post-pandemic de-correlation, where car prices increased more than inflation. However, it has not affected demand significantly, and we see that this delta is converging.

Still, it doesn't add up to me that we have a market for new cars at current prices, so it must be the way to buy them via financing that keeps this demand up.

Double-clicking on the automotive financing industry, in the United States, vehicle financing is a well-established market, where the average term of these loans is between 60 and 72 months. This market has several financing alternatives, such as:

1. Financing through Dealers and/or Banks (credit cards)Many times, car dealers collaborate with banks and finance companies to offer loans to their customers directly at the point of sale.
2. LeasingA very popular option in the U.S., where consumers pay a monthly fee to use the vehicle for a specified period, usually 2-3 years, without ever acquiring ownership of the vehicle. Leasing accounts for approximately 30% of all new vehicle registrations. This modality is especially attractive for those who prefer to change cars frequently and do not wish to commit to a long-term purchase.
3. Cash purchase: The traditional option today is on the way out, representing less than 15%, due to the high prices of new cars.

What is happening in Chile

In Chile, financing options are also varied, although the market is smaller compared to the U.S. The main options are:

1. Auto loansOffered by banks and finance companies, with terms that commonly vary between 24 and 60 months.
2. Credit through dealersSimilar to the U.S., where dealers work with financial institutions to offer credit plans to buyers. This alternative accounts for 70% to 80% of total new car sales, with various methodologies such as traditional credit, smart credit and other more sophisticated ones.
3. Operating leasingAlthough not as popular as in the U.S., it is gaining ground, especially among companies and professionals seeking to optimize their operating costs. In Chile, leasing still represents a smaller share of the market compared to the U.S., with an estimated share of around 10-15%. However, it is growing as more consumers and companies see the benefits of this modality, such as the inclusion of maintenance and insurance in the monthly payments.

Trends in Latin America

In the Latin American context, vehicle financing varies significantly among countries due to differences in economics, regulation and consumer behavior. Some notable trends include:

1. Leasing growthIn countries such as Mexico, Colombia and Brazil, leasing is gaining popularity, especially in the corporate sector. The share of leasing in the region is still relatively low, at around 5-10% on average, although it is on a growth trajectory. The perception of operational and fiscal benefits, together with the growing interest in subscription models, is driving this trend.
2. Financial innovationsFintech platforms are starting to offer new financing solutions, making the process more accessible and faster.
3. Preference for used: In many LATAM countries, the purchase of financed used vehicles continues to be more common due to economic conditions.

What about electric cars?

Unlike the full car market, in developed countries, financing via leasing or renting of electric cars is even more popular due to:

Rapidly evolving technology, as electric cars are constantly improving in terms of range, battery technology and software features. Leasing allows consumers to access the latest innovations without making a long-term commitment.

Financial and fiscal incentives offered by the government, such as incentives to use clean means of transportation.

Depreciation is a relevant cost in this type of vehicles, since they tend to depreciate faster due to technological obsolescence. Leasing transfers the depreciation risk to the lessor instead of the consumer. Monthly lease payments are often lower compared to payments on vehicle purchase loans, making electric cars more affordable for a larger number of consumers.

Conclusion

Vehicle financing shows interesting dynamics in Chile, being a very competitive industry. It remains to be seen how it covers with new products the generalized rise in car prices and new consumers, especially with products with different characteristics, such as electric cars. 

This is in addition to the preferences of the new generations, who do not seek ownership of their assets, but prefer to pay for use and not have to bear the financial responsibility that a semi-durable asset such as a car requires.

In addition to this, understanding that the AFP withdrawals have greatly harmed long-term rates, and specifically the average Chilean, we see how generation X and Z are further and further away from the dream of owning their own home. In one of those, maybe their priorities change to the dream of the car of the year.

Andrew de Carcer
Portfolio Manager Senior Private Debt Fynsa AGF