Don't be on the wrong side of interest rates: How to finance your first car?
Around 5.7% of first-time buyers fall behind with their repayments or change to a more affordable car within the first 12 months. Standard Bank says 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,” says Doret Jooste, Standard Bank’s Head of Money Management and Advisory.
Jooste points out that for many, a car is their first major asset, symbolizing newfound independence. However, this significant purchase can be daunting, often leading to emotional decisions, especially during economic uncertainty. Many first-time buyers overlook the financial implications and may not realize how their banks can support them through challenging times.
Below, Standard Bank provides valuable tips to help first-time car buyers and offers guidance on how to manage financial difficulties so that these consumers can continue building their wealth.
Q: How to future-proof my vehicle finance agreement?
A common financial pitfall is purchasing a car based on the highest monthly payment first-time buyers can afford. The rule of thumb 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,” explains Jooste.
Currently, Standard Bank 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 higher income groups in the bank’s Prestige and Private Banking client bases spend an average of 13% of their monthly incomes on vehicle instalments. “Even within 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,” adds Jooste.
Q: Will paying a deposit hep me?
The size of your downpayment play a huge role in keeping your monthly instalment below your maximum budget. Jooste adds: “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.”
Q: How long should my loan term be?
An instalment sale agreement can allow you to repay the loan plus interest for up to 84 months. You can also add a balloon payment to lower repayments. This means you defer the payment of the balloon amount to the end of your contract as the last repayment amount. 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.
Q: 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 fluctuated. Standard Bank predicts two rate cuts by year-end, starting with a 25 basis points decrease in September. While current forecasts might suggest advantages for linked interest rates, Standard Bank’s Head of Business Solution Design, Marelize Lombard, cautions 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,” says Lombard.
Q: What to do if I struggle with my monthly repayment?
Failure to pay your instalments timely or not paying them in full can harm your credit score. If you are struggling to make repayments or can’t make up for the missed payments in one go, pro-actively reach out to your vehicle loan provider or bank to seek assistance. Banks and financial institutions offer debt relief solutions to assist clients who may default on their repayments or those who have defaulted. Standard Bank’s Debt Care Centre offers solutions like spreading the arrears over the remaining loan term, payment holidays, debt consolidation, or extending your loan term. These solutions may increase your loan-term over time; however, they’ll bring relief on your monthly repayments. It is important to be proactive in engaging your credit provider to avoid negative impairments on your credit history.
Standard Bank also offers its EasySell service to facilitate urgent sales for customers needing assistance. Partnering with car dealerships, they market and sell vehicles nationwide, “This allows consumers to settle their vehicles without negative effects on their credit records. It has helped some customers purchase more affordable alternatives,” says Lombard.
In conclusion, Jooste and Lombard advise first-time buyers to carefully review their finances and thoroughly research their financing options before committing.