Credit Act cracks down on reckless buying

2012-08-12 17:51

Johannesburg – South Africans are not taking unsecured loans willy-nilly to buy cars. Retail banks say the relationship between the steep growth in unsecured loans and the recent sharp increase in new vehicle sales in a poor economic climate is, according to their data, insignificant.

Unsecured or personal loans are granted on the strength of the borrower’s creditworthiness and no additional security (such as an asset) is required – as would be in the case of secured loans like vehicle finance and home loans.

Chris de Kock, head of sales and marketing at WesBank, says that although in the past three years the bank’s deposits have taken a slight dip as a percentage of its new vehicle financing business, they are not significantly altered.

The bank’s data do not indicate that people are taking personal loans to put down a deposit on a new car, he said.

He said there has always been a market for personal loans to buy used cars because usually the biggest banks only finance cars that are up to five years old. That’s because the vehicle (asset) is used as security for the loan.
Nevertheless, in the past couple of years the used vehicle market has not grown at the rate that unsecured debt has grown and there is consequently no indication that personal loans are being used increasingly to finance used vehicles.

De Kock says even if a consumer can get an unsecured loan after his application for secured credit has been turned down, the value of these loans is generally insufficient to enable him or her to buy a car.

Keith Watson, director of strategy and business support at Standard Bank, also says it is unlikely that people use unsecured debt to a great extent to finance vehicles.

Although all banks advertise unsecured loans of up to around R250 000, very few people qualify for such amounts.

Watson says the interest rates on unsecured loans, because of the risks associated with them, are also considerably higher than those on secured loans.

It would therefore make no sense to take a loan at a higher interest rate to acquire an asset classified as secured, he says.

Watson says it is indeed true that South Africans are very status-conscious.

He believes one of the ways South Africans advertise their status is by displaying their visible wealth – people tend to believe that someone with a certain type of car has a big salary or is wealthy.

Legislation like the National Credit Act has created very good measures to ensure that, before finance is granted, people can afford the items they want to buy, says Watson. He reckons this has largely put a stop to potentially reckless lending.

He also points out that the rising trend of financing vehicles over longer periods with a balloon payment when the agreement expires can be problematic as it takes longer for the outstanding debt to match the value of the vehicle.
If customers want to buy a vehicle later, it will therefore take longer before they can trade in theirs for a value matching the outstanding amount of the loan.

- Sake24

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  • alan.jerrold - 2012-08-13 09:26

    Rather avoid 'balloon payments' if you can. If you so desperately need to boost your image with a fancy car that in practical terms you can't really afford, you ARE going to land in a sinkhole of debt. A balloon payment deal does result in a lower repayment per month, because you are in effect only paying off 'part' of the car, but you are still being charged interest on the whole of the car. When it come to the end of the specified time period, you either have to take out new finance if you want to keep your car, or surrender it and get nothing back, or if the value has dropped, you may have to pay in many thousands of rands. 'Real value' is money in your back pocket, not some false image.

      mike.immelman.7 - 2012-08-13 09:33

      I was under the impression that you could not refinance the vehicle because it was now 5 years old - so how does the buyer plan to raise the finance now ?

      afrikeni - 2012-08-13 10:12

      You can say again, all they see is here is the Merc C class, BMW 3 Series etc for R3,999 per month (very affordable ladies & gents) with small print residual percentage, which amounts to R150,000 at the end of finance, eish.

      Zygomix - 2012-09-01 13:12

      Well said.

  • GerhardVO - 2012-08-13 12:06

    And yet, 46% of SA's credit active consumers have 'impaired credit records". The fact is very few people buy cars with cash. Our economy is not creating true wealth, it is creating more debt, our savings are way down,. The recent up-tick in car sales is only to be short term, in my opinion. We are going to run into trouble, I think ...

  • MrG - 2013-03-17 01:31

    'Legislation like the National Credit Act has created very good measures to ensure that, before finance is granted, people can afford the items they want to buy, says Watson. He reckons this has largely put a stop to potentially reckless' lending Plenty reckless lending going still being done... actually sow a load ad on IOL .... they will lend to people with' impaired credit records... that is also reckless

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