Almost every car loan advertisement in Pakistan mentions KIBOR, usually in the form “1-Year KIBOR + 3%”. Few explain what that means for the amount you pay each month, or how it compares with a bank that simply quotes a fixed rate. This guide covers both, with numbers, so you can choose the type of rate that suits your budget.
What KIBOR is
KIBOR stands for Karachi Interbank Offered Rate. It is the rate at which banks say they are willing to lend to each other for a set period, published every working day for terms from one week to one year. Car loans are almost always linked to the 1-Year KIBOR. It closely follows the State Bank of Pakistan’s policy rate, which is currently 12.00%, because the policy rate sets the cost of money in the whole banking system. When SBP cuts the policy rate, KIBOR usually falls within days; when it raises it, KIBOR rises.
At our last review, 1-Year KIBOR stood at about 10.89%. We update this figure every month across all calculators on the site.
How banks turn KIBOR into your rate
A variable-rate car loan is priced as KIBOR plus a spread. The spread is the bank’s margin and stays fixed for the life of the loan; KIBOR is the part that moves. If a bank offers you KIBOR + 3.5%, your rate today is about 14.39%. Banks set the spread according to the product and your profile, so an existing customer with a large salary account might be offered a lower spread than a new customer. Our bank-by-bank markup rate guide lists the spreads currently quoted.
The important detail is when the rate resets. Most banks reprice once a year, on your loan anniversary, using KIBOR as it stands at that time. Your installment then stays the same for the next twelve months. A few products reprice more often, so check the offer letter.
How much a change in the spread or in KIBOR moves the installment
Take a financed amount of PKR 2.1 million over five years, typical for a Suzuki Alto or similar small car. At KIBOR + 3.5% the installment is about PKR 49,289 a month. If you negotiate the spread down to 2.5%, it falls to about PKR 48,202, a saving of roughly PKR 1,087 every month. At a spread of 4.5% it rises to about PKR 50,390, which is PKR 1,101 more. A one-point move in KIBOR at your anniversary has a similar effect on the remaining installments, slightly smaller because by then part of the loan has been repaid.
In other words, a single percentage point is worth roughly a thousand rupees a month on a loan of this size. That is worth negotiating for, and worth planning for if KIBOR is expected to rise.
Fixed rate: certainty at a price
Some banks offer a fixed rate for the whole tenure, for example HBL CarLoan and Soneri Bank, and others such as UBL let you choose between fixed and variable. With a fixed rate your installment never changes, whatever happens to KIBOR. The bank is taking on the risk that rates rise, so fixed rates are usually set a little above the variable rate on the day you borrow.
Which should you choose?
Choose a fixed rate if your budget is tight and an increase of a few thousand rupees a month would cause real difficulty, or if you expect interest rates to rise during your loan. Choose a variable rate if you expect rates to stay flat or fall, if you can absorb some movement, or if the fixed rate on offer is noticeably higher. When the policy rate has recently been cut sharply and further cuts are expected, a variable rate tends to work out cheaper. When inflation is rising and the State Bank is tightening, fixing the rate is the safer option.
Keep the tenure in mind too. Under SBP rules, cars above 1000cc can only be financed for three years, which limits how many times a variable rate can reset. On a five-year loan for a small car there are four resets, so the choice matters more.
Islamic financing and KIBOR
Islamic banks also use KIBOR as a benchmark for the rental under Car Ijarah or Diminishing Musharakah. The contract is a rental or partnership rather than a loan, but in practice the rental is reviewed annually in the same way. Many Islamic products also offer a fixed rental option.
If rates fall after you borrow
On a variable rate you benefit automatically at the next anniversary. On a fixed rate you do not, although you can pay the loan off early and refinance. Compare the early settlement charge with the saving from a lower rate using the early settlement calculator before you switch.
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