Navigating vehicle finance during challenging economic times

By Dumisani Zwane, MFC Executive

The road to vehicle ownership is often paved with financial complexities, and the current challenging economic landscape has added a variety of speed bumps and road hazards to further complicate the journey.

Rising inflation, lingering interest rate uncertainty, and shifting consumer spending habits all have a profound impact on car financing options and affordability, making it imperative for vehicle buyers to ensure they have a firm grasp on all these factors before they commit to a finance agreement.

The intricate relationship between economic challenges, affordability and car financing options was highlighted by the findings of recent releases of the TransUnion Vehicle Price Index (VPI), which is a key barometer of sentiment and activity in South Africa’s new- and used-car industries. The findings reveal that the current economic challenges continue to exert pressure on the South African vehicle market as reflected by the trends in the latter part of 2023 and into early 2024. Despite a moderate recovery projection in the coming years, average domestic new-vehicle sales as of March 2024 experienced a notable year-on-year decline. Specifically, new passenger car sales showed a significant downturn, with a decrease of 15,1% when compared with March 2023, underlining the ongoing consumer shift towards more economically viable options, such as used cars and new-energy vehicles (NEVs). The latter category has, in fact, seen a substantial increase in sales, indicating a pivot in market demand that could shape future trends.

The economic challenges have also prompted financial institutions to become more stringent in their lending, which has affected the ability of lower-income individuals to secure vehicle finance. To help consumers navigate these headwinds, manufacturers and dealers are likely to maintain or even increase the availability of discounts and flexible financing arrangements to attract buyers and stabilise the new-car market in future.

Consumers are also trying to find ways to afford the vehicles they want. Historically, South Africa has a legacy of instalment sales in vehicle financing. This has continued, but the current affordability crunch has led many car buyers to opt for longer finance periods, sometimes extending them to up to 84 or even 96 months. These longer finance arrangements are a testament to the flexibility of the market and finance providers, making vehicle ownership more accessible during tough economic times by creating manageable monthly payments.

More importantly, these longer finance terms come with options that can benefit the consumer significantly. For those who find themselves in improved financial situations over the term of the contract, there are various options available. They can choose to settle their finance early, thereby saving on the interest that would have accrued over the full term. Alternatively, they can increase their monthly instalments to reduce the original term, or even make lump sum payments whenever possible, thereby reducing the overall term while keeping their instalments constant.

Consumers must understand that when choosing a finance agreement, the responsibility lies with them to select an arrangement that aligns with both their current financial situation and anticipated future standing. This foresight and strategic planning can turn a potential long-term commitment into an opportunity for financial optimisation, even if the economic downturn persists.

Industry innovation is key

To navigate the various economic challenges consumers currently face, innovation in the financial services space is paramount. Vehicle finance products must evolve to adapt to the shifting economic landscape. This is why leasing is gaining traction as a vehicle finance alternative, and most vehicle producers are gravitating towards guaranteed-residual-value finance agreements. These agreements aim to shield consumers from the impact of high market volatility levels and excessive depreciation on their vehicles, which can negatively impact their future buying power.

Consumer education also plays a vital role in helping vehicle buyers navigate their finance options during challenging times and avoid some of the most common mistakes made by vehicle buyers and owners, including the following:

  • Ignoring balloon payments – Balloon options often surprise consumers at the end of their finance term when they suddenly discover they still owe a large sum on the vehicle. It's vital to be aware of the terms of your contract and the implications of balloon payments on your finances before signing a finance agreement.
  • Misunderstanding voluntary surrender – Surrendering a vehicle doesn't erase the debt. In fact, it often leads to a financial shortfall after the bank has sold the vehicle. Being unable to pay this shortfall can negatively impact the individual’s credit score.
  • Not taking out comprehensive insurance – Failing to insure a financed vehicle comprehensively can expose the car owner to substantial risks. In the event of theft, accidents, or damage, they may find themselves without a vehicle but still liable for the finance payments.
  • Neglecting your duties as an owner – If vehicle buyers find themselves in a dispute with their dealer, they are still responsible for making payments on their vehicle finance account. Failing to do so can result in arrears and the vehicle being repossessed.
  • Failing to make payment arrangements – If a consumer anticipates difficulties in meeting their vehicle finance obligations, they should reach out to their finance provider immediately to discuss a payment arrangement. Committing to a plan is essential because failing to stick to the payment arrangement can lead to vehicle repossession.

While knowing these potential vehicle finance pitfalls is vital, it is just as important to be aware of the many innovative opportunities that are being made available by manufacturers, dealers and financiers. As the South African economic landscape continues to evolve, understanding all the nuances of vehicle financing is the best way for South African car buyers to put themselves in the driving seat and make wise buying and financial decisions that align with their current and future financial realities.