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New Interest Rate Hike Increases Pressure on Financed Vehicle Owners

vuyi on April 4, 2023

Press Release: Wesbank

The recently increased repo rate, coupled with rising inflation, a deteriorating Rand, slow economy, unemployment and other global factors are creating tough living conditions for many South Africans.

The South African Reserve Bank (SARB) has recently announced a further hike in the repo rate of 50 basis points. This is the second rise in interest rates this year, following a 25 basis points increase by the SARB’s Monetary Policy Committee at the end of January. With the repo rate now standing at 7.75% from 7.25%, the current prime lending rate shifts from 10.75% to 11.25%, its highest level since 2009.

This increase directly impacts people who are paying off loans such as vehicle finance or a home loan coupled to the interest rate, as the monthly repayment will increase. In a weak economy with slower inflation, the high cost of living and increasing food prices, many South Africans are struggling to stretch their already-strained budgets to reach month end. The new repo rate announcement puts added pressure on consumers.

“An interest rate hike has a ripple effect across all sectors of the economy. Our customers are not unaffected by this higher cost of borrowing either,” comments Lebogang Gaoaketse, Head of Marketing and Communication at WesBank. “Those customers whose vehicles are financed through WesBank with a fixed interest rate, are not affected by the rate hike. However, those customers who opted for a linked rate will see their monthly car repayment increasing.”

What is a fixed interest rate versus a linked interest rate?

The interest rate affects the amount a bank or finance house such as WesBank charges you for borrowing money. The amount you need to pay back is determined by the interest rate on your finance agreement and, despite the latest increase, is still relatively low for anyone repaying a vehicle finance loan. When buying a vehicle, new or used, customers have the option to choose between a fixed or linked (variable) interest rate for their vehicle finance agreement.

As it stands, a fixed interest rate will not change for the duration of your payment period. This can work in your favour, especially if the interest rate is as volatile as is currently the case in South Africa, and you want the security of a constant fixed monthly repayment. If the rate drops. you will continue to be charged the agreed higher fixed interest rate.

A linked interest rate is linked to the prime lending rate and fluctuates with the SARB’s repo interest rate. If the rate increases, as it has recently, so will your repayment amount. However, if it is lowered, you will benefit from a lower monthly repayment and have some extra money in your account. Linked interest rates are usually slightly lower than fixed.

“It is also important to remember that vehicle ownership is more than the initial price tag. You also need to take into account the monthly repayments plus the added costs of fuel, comprehensive insurance cover, as well as general maintenance and service expenses. And, of course. the interest rate hikes that continue to directly impact consumers’ monthly budgets,” comments Gaoaketse.

There isn’t a one-size-fits-all solution to structuring a car finance deal. Knowing how much you can realistically afford on the vehicle repayment, including interest rates and other increases, will stand you in good stead. But, it’s not only about cars. The increased interest rate also impacts credit cards, home loans and clothing accounts among others. Consumers with additional debt will notice the increased repayments starting to affect their budgets, as household debt levels in South Africa remain at high levels.

Rising interest rates and inflation, brought on by a deteriorating Rand, a tough economy and other global factors, could see buyers postponing new vehicle purchases, buying down or even exiting the new car market altogether in favour of better value in the used car market.

Demystifying vehicle finance lingo: Part 1

vuyi on March 11, 2021

It’s all very well to find a car that you both like and can afford, but you also need to understand all the financial jargon that comes with making the purchase.

There is no shame in admitting you don’t know what a balloon payment is, or the difference between fixed and linked interest rates. While all these terms can be intimidating the first-time round, doing research will ensure you get the best financial deal on your set of wheels.

Before you get to the part where you drive off in your car, let’s get back to understanding the payment deal to make sure you sign up for the best financial plan that suits your needs and more importantly, your pocket.

“Car ownership is more than the initial price tag. A customer will need to consider monthly repayments, plus the added costs of fuel, comprehensive insurance cover and general maintenance and service expenses when buying a car.”

– Kutlwano Mogatusi, WesBank Motor’s Communication Specialist.

Here’s the first of our 2-part guide to understanding vehicle finance jargon which will help you make the right choices:

1. Interest rate: The interest rate affects the amount a bank charges you for borrowing money and the amount you need to pay back is determined by the interest rate on your finance agreement. The current low interest rate is good news for anyone repaying a vehicle finance loan.

2. Fixed or linked interest rate: You can choose between a fixed or linked (variable) interest rate on your vehicle finance agreement. As it says, a fixed interest rate remains the same, as does your monthly instalment. A linked rate fluctuates with the prime interest rate set by the South African Reserve Bank – if the rate increases, so will your payment but if the rate goes down, you will benefit from a lower monthly payment.

3. Deposit: This is a cash amount you pay upfront before the vehicle finance agreement starts. This amount is deducted from the price tag, so it makes sense that the bigger the deposit you can pay, the less you will owe on the car in the long run.

4. Finance period: The finance period is the length of time you agree to in the contract to pay off the car. It affects your monthly instalment and interest amount. A longer period may mean a lower instalment but the interest adds up so you could end up paying more. A shorter payment period might incur a slightly higher monthly payment but lessens the interest paid out in the long term, which is a good thing.

5. Balloon payment: A balloon payment is a lump sum amount that still needs to be paid at the end of the vehicle finance contract. So, on the upside, while it reduces your monthly instalment for the contract period, you will need to settle it in full at the end, so be cautious of this payment option. Because you may end up paying more interest in total in the long term, you need to make sure you have budgeted and saved enough to pay off the outstanding balloon payment. This amount however can now be refinanced, which will extend your term to pay back the car loan.

“Now that you understand the jargon and consider yourself to be vehicle finance savvy, all that’s left is to check the vehicle finance agreement, including the small print, and sign on the dotted line – but, only once you’re satisfied with all the terms and conditions. Then, you are ready to safely take to the open road in your very own car,” says Mogatusi.