What not to do when buying a car in South Africa
Standard Bank says that many first-time car buyers do not consider the impact of interest rates when purchasing a car.
Standard Bank said that roughly 5.7% of first-time buyers fall behind their repayments or change to a more affordable car in the first year.
Standard Bank said that the industry has recorded an increase in these cases in recent years.
“It is common for first-time buyers to be caught off guard when interest rates rise. In recent years, the rising cost of living has made this situation even more challenging,” said Doret Jooste, Standard Bank’s Head of Money Management and Advisory.
Although a car can be a major asset, the significant purchase can be daunting, which leads to emotional decisions.
Standard Bank provided the following tip for first-time car buyers, but many of the same tips can still be applied to those who already own cars.
Cost
A common mistake is purchasing a car based on the highest monthly payment that one can afford.
As a rule of thumb, allocating up to 20% of one’s monthly income to all car-related expenses is best.
“If your monthly income is R25,000, your car instalment should be lower than R5,000 to make room for insurance and fuel costs,” said Jooste.
Standard Bank data showed that middle-income customers spend roughly 20% of their monthly income on their vehicle instalment alone.
That said, over 51% of this client base spends over 20% of its monthly income on repayments.
The higher-income groups in the bank’s Prestige and Private Banking client bases spend an average of 13% of their monthly income on vehicle instalments.
“Even within this group, one in five individuals allocates more than 20% of their income to car repayments,” added Jooste.
“This suggests that a significant portion of their income is being spent on the car alone and does not include other additional vehicle-related expenses such as paying for insurance, fuel and maintenance.”
The role of a downpayment
The size of a downpayment plays a huge role in keeping one’s monthly instalments below one’s maximum budget.
“Aim for 10% to 20% of the car’s price as a down payment to lower the size of the loan you’ll need and your interest rate.”
The length of the loan
An instalment sale agreement can allow someone to repay their loan plus interest for up to 84 months, with one able to add a balloon payment to lower repayments.
This means that one can defer the payment of the balloon amount to the need of one’s contract as the last repayment amount.
It is also worth noting that customers who cannot afford to pay a balloon in full at the end of a loan term can also respread and pay off the amount over a period of 12 to 36 months.
It is worth noting that customers who cannot afford to pay the balloon in full at the end of the loan term can respread and pay off this amount for a period between 12 and 36 months.
The type of interest rate
Monthly car payments have increased a large amount over the last four years.
Standard Bank expects interest rates to be cut by 50 basis points by the end of the year.
Although forecasts suggest advantages for linked interest rates, Standard Bank’s Head of Business Solution Design, Marelize Lombard, warned that both options have pros and cons.
“Fixed rates offer predictability and protection from rate hikes but are usually higher. While prime-linked rates can be lower, they pose a risk of higher repayments if rates rise, complicating budgeting,” said Lombard.
The dangers of not paying a loan back on time
Failure to pay instalments can negatively affect one’s credit score.
Standard Bank said that it is best to proactively contact their vehicle loan provider of bank to seek assistance if they can’t afford to make repayments.
Jooste and Lombard said that first-time buyers should carefully review their finances and thoroughly research their financing options before committing to a new car.
Read: Great news for petrol prices in South Africa next month
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