R830 per month blow to car owners in South Africa leaves a dent

 ·4 Jul 2024

High interest rates in South Africa have put a significant strain on car owners with car loans over the past year, leading to a rise in delinquencies.

Since May 2023, with interest rates held at 15-year highs, it has cost those with vehicle asset finance, on average, an extra R834 per month to cover their loans, which has contributed to the severe financial pressure households are under.

This has rippled across the vehicle market as well as first-time car buyers in the country.

Data from TransUnion showed that new vehicle prices rose 4.7% for the first quarter of 2024 compared to last year.

Combined with interest rates and the marginal increase in the average loan amount, there is evidence that many households are opting for one multi-purpose vehicle rather than maintaining multiple vehicles.

Data from WesBank, the largest vehicle and asset finance institution, indicates a 3.5% increase in the average loan amount for new vehicles in June.

Additionally, the average deal duration has risen by 3.8% to over 51 months, with the average contract period now exceeding 73 months compared to a year ago.

Lebo Gaoaketse

Lebo Gaoaketse, head of marketing and communication at WesBank, told BusinessTech that these trends suggest affordability challenges, possibly leading consumers to retain their existing vehicles for longer or extend loan periods to reduce instalments.

Wesbank added that high interest rates continue to significantly impact debt, and relief is not expected until the second half of the year or even next year.

This is unsurprising when you consider the increased costs associated with the latest interest rate hike cycle.

In May 2024, the South African Reserve Bank’s (SARB’s) Monetary Policy Committee decided to keep interest rates unchanged.

The repo rate remains at 8.25%, and the prime lending rate stays at 11.75%. This decision was unanimously agreed upon.

The real cost of interest rates

Rates have increased by 475 basis points since November 2021, marking the highest levels seen in 15 years.

Interest rates have been steady at this level since the last policy rate decision a year ago, adding financial pressure on households as they also grapple with other increased costs, such as electricity, fuel, and property rates.

The latest report from TransUnion’s Vehicle Price Index for Q4 2021 indicates that the average value of a financed vehicle is approximately R360,000.

This coincides with the start of an interest rate hike cycle. WesBank also noted that the average amount for a new vehicle financed through their institution was about R358,390 at the same time.

For those who purchased a car valued at this amount at the beginning of the interest rate hike cycle at 7% (prime rate in September 2021), they have been paying an additional R834 per month on their car loan at the current 11.75% prime rate (since May 2023).

Assuming a 60-month (five-year) payment term and a 0% deposit, this results in an extra cost of R10,008 over the past year (May 2023 to May 2024).

However, the additional cost increases with the vehicle’s price, as those who bought a R500,000 car pay an extra R1,161 per month, while those who purchased a R1 million car pay a significant R2,320 extra per month.

This translates to an additional R13,932 and R27,840, respectively, since May 2023.

According to TransUnion, this is partly to blame for the credit bureau’s serious vehicle asset finance delinquency rate of 5.4%—measured as a percentage of accounts three or more months in arrears.

Vehicle asset finance delinquencies have worsened by 20 basis points year over year.

“Layer in the other inflationary costs of living to that consumer, and you can imagine the pressure on household budgets,” added Gaoaketse.

“Those with an option to delay a purchase decision or opt for alternative mobility solutions, including e-haling, sharing, or the pre-owned market, are voting with their feet and exiting the new vehicle market,” he said.

Figures released by the Automotive Business Council showed the South African new vehicle market continues its contraction.

Passenger cars declined 9% to 26,928 units, while Light Commercial Vehicles were down 24,3% at 10,552 vehicles.

Five out of six months of significant market decline have meant that first-half sales look consequently bleak.

Year-to-date, new vehicle sales have declined 7.4% to 246,052 units, leaving a possibility of the market failing to reach 500,000 units this year.

“Vehicle price inflation, high interest rates, and the general rising costs of living are all impacting the ability of new car buyers to enter or stay in the market,” said Gaoaketse.

“Until there is some relief in interest rates, greater incentive deals from manufacturers, or a significant shift in general inflation or earnings, the new vehicle market will continue to remain under pressure,” he added.


Read: 10 suburbs where South Africa’s young middle class want to live – and what they’re paying

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