According to the banking industry, around 5.7% of first-time buyers fall behind with their repayments or change to a more affordable car within the first 12 months.
“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.
Jooste points out that for many, a car is their first major asset, symbolising newfound independence. However, this important purchase can be daunting – often leading to emotional decisions, especially during economic uncertainty. Many first-time buyers overlook the financial implications and may not know how to make the best financial choices.
Jooste said a common mistake is buying a car based on the highest monthly payment first-time buyers can afford. The general guideline is to allocate up to 20% of monthly income towards all car-related expenses.
“If your monthly income is R25,000, your car instalment should be lower than R5,000 to make room for insurance and fuel costs. Our data shows that middle income customers spend an average of 20% of their monthly income on the vehicle instalment alone. However, more than half (51%) of this client base spends more than 20% of its monthly income on repayments.”
The bank’s statistics indicate that higher income groups spend an average of 13% of their monthly income on vehicle instalments. Even with this group, one in five individuals allocates more than 20% of their income to car repayments.
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,
— Doret Jooste - Standard Bank
“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,” added Jooste.
Jooste suggested these other considerations when buying a car.
Will paying a deposit help me?
The size of the downpayment plays a huge role in keeping the monthly instalment below the maximum budget one might be prepared to spend. 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.
How long should my loan term be?
An instalment car sale agreement can allow the buyer to repay the loan plus interest for up to 84 months, which is 7 years.
The buyer can also choose to take a balloon payment, which is a larger-than-usual one-time payment at the end of the loan term, to lower monthly repayments. This means the buyer can move the payment of the balloon amount to the end of the contract as the last repayment amount. Buyers 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.
Should I fix my car interest rate or link it to prime?
Monthly car payments have changed a lot in the past four years as interest rates tend to move up and down based on the economic conditions.
Fixed rates offer predictability and protection from rate increases but are usually higher. While prime-linked rates can be lower at the time of the agreement, they pose a risk of higher repayments if rates rise as economic conditions cannot be predicted, this can complicate budgeting.
What to do if I struggle with my monthly repayment?
Failure to pay the agreed instalments timely or not paying them in full can harm the buyer’s credit score.
If a buyer is struggling to make repayments or can’t make up for the missed payments in one go, they can reach out to the vehicle loan provider to seek assistance in finding appropriate alternatives or solutions to manage the credit repayments effectively. Banks and financial institutions offer debt relief solutions to assist clients who may default on their credit repayments or those who have defaulted. These solutions include spreading the arrears over the remaining loan term, payment holidays, debt consolidation, or extending your loan term. These solutions may increase the loan-term over time however they bring relief on the monthly repayments.
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