Purchasing Power to the People
Fifteen months after they started making payments toward their new car, Jose de Jesus Mejia and his wife, Marcela, finally picked up their gleaming Chevy hatchback. And they were thrilled.
They are among more than 60,000 customers of Autofin, the innovative Mexican company whose name in Spanish is short for “self-finance.”
Autofin was founded in 1978 and grew out of the ubiquitous neighborhood savings schemes popular across Latin America, South Africa and other parts of the developing world where conventional finance doesn’t reach.
In traditional Mexican savings clubs, called tandas, members save a bit each week and hold weekly drawings to pay out the money collected to one lucky member. Peer pressure is a key factor in keeping people’s payments up to date.
Autofin and a few smaller competitors in Mexico have refined the concept into a sophisticated, rigorous business that is regulated by the commerce department and the consumer protection agency.
It is an important source of alternative finance in a society where chronic economic instability has left banks unable to provide financing to consumers at affordable rates.
Autofin initially offered only car financing; 45,000 clients are enrolled in its car-purchase pools. In 1994, legislative reforms allowed Autofin to offer home financing as well, and this has attracted 18,000 customers at a time when banks are granting few new mortgages.
It works like this: People join pools of 125 car buyers or 500 house buyers and make monthly contributions toward their goal. Only after a minimum number of on-time payments--the equivalent of a down payment--do clients qualify to acquire their car or house. In addition, lotteries and auctions within each group offer chances to get the goods earlier--though the balance due must still be paid.
As in the ancient tandas, pressure from group members is important. Monthly meetings are well-attended. And penalties for failing to make payments are severe: You get back your contribution only at face value, not indexed for Mexico’s 17% inflation, and you are docked two monthly payments. If you’ve already acquired the goods, the car or house is seized if you miss two payments. Defaults are uncommon.
“I wouldn’t have risked a bank loan for this car,” Mejia said as he claimed his car at Autofin’s Mexico City headquarters. “With the chaotic exchange rates and high interest rates we have, I wouldn’t have risked it.”
The monthly contributions are constantly adjusted and indexed so that the total payments will cover the cost of the asset. Customers know this in advance and accept it.
“We have many clients from the informal economy who would never qualify for bank credit but whose [repayment] performance is fine,” said Agustin Pineda, Autofin’s commercial manager.
In October, Autofin delivered 1,280 cars, as well as $15.7 million worth of housing finance. Cars are bought over 50 months and can be delivered after 15 on-time monthly payments.
The housing finance is more complex. Typically people have 200 months to pay for a predetermined amount of financing, which can cover the cost of a small house, a down payment for a larger home or a renovation. They receive that financing after 50 months of payments, and then they continue paying off the balance as they would with a mortgage.
Pineda said Autofin is owned by several families who have financed its growth from cash flow, without borrowing. The company employs 1,300 people. Like all businesses, the firm was devastated in 1995 after the peso devaluation and resulting deep recession, and thousands fell out of the Autofin program. But it has recovered steadily since then.
“The Latin people, and poor countries generally, don’t have a strong savings culture,” Pineda said. “So these schemes oblige people, once they are in, to keep going until they achieve their goal.”
