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Johannesburg - Many South Africans haven’t capitalised on the opportunity low interest rates bring, according to Cyril Zhungu, general manager of WesBank’s motor division.
Motorists could have been making cost-effective choices when structuring their finance contracts, said Zhungu. They could have saved lots of interest by opting for fixed rather than linked interest rates.
"While the 0.5% interest rate increase has ruffled consumers back to the realities of their debt, it shouldn’t be considered alarming," said Zhungu.
"For every low, there is a cycle that will invariably end in a high and the past 18 months have been the low of the interest rate cycle."
When considering a monthly mobility budget, there are some areas that remain possible to control.
The cost of a vehicle is effectively made up of four key areas: The cost of maintaining it, insurance, fuel and the actual installment on the finance contract of the vehicle itself.
Maintenance costs are generally beyond an individual’s control, said Zhungu.
These are either covered by a service or maintenance plan or certainly required expenditure when something goes wrong.
"Insurance costs can be competitively managed if you shop around, but remain at a requisite level," he said.
Operating costs
The operating cost relies on a dictated fuel price (which has doubled in price from five years ago), which can be managed to an extent by careful travel planning, but daily commuting is an enforced basic.
"Add administration fees, such as licencing and – for some – tolls, and motorists have little room to manage these costs other than to prepare for further aggressive increases," said Zhungu.
"What consumers do have more control over than many imagine, is the actual finance contract to purchase their vehicle of choice to begin with. And the golden opportunity remains to capitalise on low interest rates by fixing it."
Fixed interest rate deals protect against future interest rate hikes by keeping them at the low levels South Africans are currently spoilt by.
"Let’s face it: There is an extremely small chance that interest rates can get any lower," said Zhungu.
"This provides some form of security blanket against monthly installments increasing beyond comfortable affordability levels in the years to come on your finance contract."
The average price of new vehicles financed through WesBank’s book increased to R246 536 in December.
Based on a traditional finance contract of a 10% deposit over 54 months linked to prime, the 0.5% interest increase translates into only a R53.09 increase in installment.
"But consider that the saving over the period of the loan is R2 866.46 and the benefits begin to become clearer," he said.
More extreme example
Consider a more extreme example like that experienced in Turkey, where interest rates have literally doubled from 5% to 10% and the impact becomes more tenable.
On a 5% increase in interest rates, our traditional motorist would suddenly experience a monthly installment increase of R545.90 and be physically spending R29 478.28 more over the period of the contract.
New vehicle prices are expected to continue increasing, perhaps even more aggressively than consumers have experienced considered the weakness of the rand, he said.
More than 70% of new cars sold locally are imported or assembled from imported parts and therefore are impacted by the weakening rand.
The fuel price should also be expected to continue increasing.
"So if you’re considering buying a new vehicle, take the golden opportunity to contain your monthly mobility expenditure by fixing the interest rate," said Zhungu.
Motorists could have been making cost-effective choices when structuring their finance contracts, said Zhungu. They could have saved lots of interest by opting for fixed rather than linked interest rates.
"While the 0.5% interest rate increase has ruffled consumers back to the realities of their debt, it shouldn’t be considered alarming," said Zhungu.
"For every low, there is a cycle that will invariably end in a high and the past 18 months have been the low of the interest rate cycle."
When considering a monthly mobility budget, there are some areas that remain possible to control.
The cost of a vehicle is effectively made up of four key areas: The cost of maintaining it, insurance, fuel and the actual installment on the finance contract of the vehicle itself.
Maintenance costs are generally beyond an individual’s control, said Zhungu.
These are either covered by a service or maintenance plan or certainly required expenditure when something goes wrong.
"Insurance costs can be competitively managed if you shop around, but remain at a requisite level," he said.
Operating costs
The operating cost relies on a dictated fuel price (which has doubled in price from five years ago), which can be managed to an extent by careful travel planning, but daily commuting is an enforced basic.
"Add administration fees, such as licencing and – for some – tolls, and motorists have little room to manage these costs other than to prepare for further aggressive increases," said Zhungu.
"What consumers do have more control over than many imagine, is the actual finance contract to purchase their vehicle of choice to begin with. And the golden opportunity remains to capitalise on low interest rates by fixing it."
Fixed interest rate deals protect against future interest rate hikes by keeping them at the low levels South Africans are currently spoilt by.
"Let’s face it: There is an extremely small chance that interest rates can get any lower," said Zhungu.
"This provides some form of security blanket against monthly installments increasing beyond comfortable affordability levels in the years to come on your finance contract."
The average price of new vehicles financed through WesBank’s book increased to R246 536 in December.
Based on a traditional finance contract of a 10% deposit over 54 months linked to prime, the 0.5% interest increase translates into only a R53.09 increase in installment.
"But consider that the saving over the period of the loan is R2 866.46 and the benefits begin to become clearer," he said.
More extreme example
Consider a more extreme example like that experienced in Turkey, where interest rates have literally doubled from 5% to 10% and the impact becomes more tenable.
On a 5% increase in interest rates, our traditional motorist would suddenly experience a monthly installment increase of R545.90 and be physically spending R29 478.28 more over the period of the contract.
New vehicle prices are expected to continue increasing, perhaps even more aggressively than consumers have experienced considered the weakness of the rand, he said.
More than 70% of new cars sold locally are imported or assembled from imported parts and therefore are impacted by the weakening rand.
The fuel price should also be expected to continue increasing.
"So if you’re considering buying a new vehicle, take the golden opportunity to contain your monthly mobility expenditure by fixing the interest rate," said Zhungu.
