Longer terms will hit car sector

Johannesburg - Longer vehicle financing periods will delay the recovery of South Africa's depressed automotive sector, according to industry experts.

The average financing term of cars in the country has increased by 25% since the introduction of the National Credit Act (NCA) in June 2007. The purpose of the NCA is to protect consumers from reckless borrowing.

One side-effect of the NCA has been longer lending periods. Absa Vehicle Asset Finance said that before June 2007, all loans were repaid within 54 months. Post-NCA at least half of new loans are paid over a period of 60 to 72 months.

Wesbank, one of the country's biggest car loan providers, said that half of all accounts closed in October 2009 were written at a term over 60 months. In contrast, 84% of accounts opened in the same month were written at a term more than 60 months.

"A longer term makes it more difficult for the customer to get out of the agreement," said Marcel de Klerk, head of Absa Vehicle Asset Finance.

Longer financing terms have resulted in a stretched car replacement cycle.

"It takes the customer out of the market for longer than previously," said Jeff Osborne, CEO of the Retail Motor Industry Organisation.

"South Africans are traditionally car mad and we used to prefer to change our cars every three years," said Chris de Kock, head of marketing and sales at Wesbank.

De Kock said that the replacement cycle of vehicles has increased from an average of 36 months to about 42 months. Wesbank forecasts this figure to increase to around 48 months in the final quarter of next year.

Longer replacement cycles mean that consumers will stay out of car showrooms - bad news for the domestic vehicle market, which has been in a severe slump during the past 12 months.

Another major hurdle to new car demand is high levels of indebtedness among South Africans. Household debt to disposable income is estimated at 76.3% in 2009 by Wesbank. This is only marginally lower than the 78.2% recorded in 2008.

"Those two factors - indebtedness and replacement cycle - combined are going to keep the pressure firmly on the industry," said De Kock.

"There is not going to be a marked increase in sales in 2010," he said, adding that some month-on-month sales increases are likely but there will be no "magical numbers" until 2011.

"And even then it's too early to guarantee anything."

- Fin24.com