When Luiz Carlos Ferreira decided he wanted to get walk-in closets built in the flat he had just bought in the suburbs of São Paulo, he faced a quandary. He did not have the money to pay the 10,000 reals ($5,700, £2,900, 3,900) bill outright and baulked at the financing packages offered by the builders and his bank, which both came in at over 6 per cent per month or more than 75 per cent per year.
So the legal worker sold his three-year-old Fiat Palio for 22,000 reals and used the proceeds both to buy the closets and pay off the balance remaining on his car. Then he walked into a Volkswagen dealer and bought a brand new Fox on credit at 15 per cent APR over 60 months.
Not only did he get access to much cheaper money, but the VW loan offered more flexibility, including the ability to accelerate payments with no penalty. Arbitraging between rates charged by financial institutions in Brazil makes a lot of sense because spreads are gaping wide.
Rates of less than 20 per cent a year are offered on cars, whereas unsecured loans start at 35 per cent per year and can skyrocket to 100 per cent or more, depending on an applicants credit history. Banks say they need to charge so much when lending on an unsecured basis because the country has a long history of see-sawing interest rates and they have only sketchy data on repayment reliability.
The low interest rates for car financing are rapidly fuelling sales, although there has been a tightening of terms and conditions in recent weeks as a result of the global credit crunch. Over 2.5m cars were sold during 2007, an increase of 28 per cent compared to 2006. All these new cars flooding on to the roads are provoking monster jams as Brazils patchy infrastructure fails to keep pace. Public holidays have become notorious for bottlenecks on roads down to the coast, leading to hoards of TV reporters heading out on foot down the main coastal highways to do impromptu interviews with passengers who can spend five hours or more to complete a journey of 40 miles.
François Huteau, the president of São Paulo-based Banco Peugeot, the financing arm of the French carmaker, says that Brazil is one of the most attractive car markets in the world. Rates have been forced down particularly far as there is cut-throat competition between banks and a host of specialist financing companies, including arms of General Motors, Volkswagen and Ford, he explains. The financing companies offer lots of flexibility to keep stock moving and commercial banks are forced to compete. We are accepting less and less as the initial down payment on the car and giving longer and longer terms, Mr Huteau says. The market got another shot in the arm from changes in the law last year that tip the balance in favour of banks in repossessing the car in the case of non-payment.
The fact that borrowers are piggy-backing off car rates to fund unrelated purchases does not worry Mr Huteau, who is familiar with the technique used by Mr Ferreira. Dealers have taken note of the trend too and are tapping into the market. The straggling Giovanni Gronchi Avenue in São Paulos southern suburbs is lined on one side with spanking new showrooms. Shoals of salesmen circulate inside.
Until other interest rates come down to more manageable levels, a growing number of Brazilians with a car will be exchanging it to get round painfully high bank interest rates. Going through the hassle of selling and buying a car might appear a radical solution to get your hands on cheaper rates, but Mr Ferreira says that he spent a lot of time shopping around. I did all the calculations and this was by far the most attractive way to finance.
As well as cheap money, he does not need to worry about maintenance: the car came with a two-year warranty.