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Beware of that ‘attractive’ 96-month car loan offer

Although longer-term loans may address affordability concerns, there are also other factors to consider.
The 72-month vehicle finance option is a more viable option compared to the 96-month car loan offer, writes the author. Image: Moneyweb

Whether you’re a petrol head or an ordinary Joe, few things trump the smell of a new set of wheels.

While transport is a major consideration for most South Africans, you only have to take a quick glance at new vehicle advertising to realise that buying a car is about much more than getting from A to B. It is about aspiration.

Yet, even for high-income South Africans, affordability can be a concern. With the economy shedding jobs and pressure on disposable income, nowadays an affordable monthly car payment is even more of a priority than it may have been a few years ago. While one answer may be to settle for something cheaper or delaying the purchase while saving up, another option is to extend the finance period or opt for a balloon payment.

Over the past six years, most South Africans applying for vehicle finance chose a 72-month finance option – effectively paying their car over six years. More recently, it is not unheard of to be offered payment terms of 84 months (seven years) or even 96 months (eight years) – a decision that can reduce the monthly instalment significantly.

Although longer-term loans may address affordability concerns, it is also likely that when you trade-in the car three or four years down the line, its market value may not be enough to cover your outstanding car debt – leaving you out of pocket for the shortfall. The longer you extend the term of your loan, the longer it will take to reach a break-even position (where the outstanding debt equals the trade-in value of the vehicle).

An example demonstrates this clearly: Let’s assume you buy a new vehicle for R250 000 and borrow the full amount (100% loan). At an interest rate of 12.5% and a finance period of 72 months, the monthly payment will be around R4 950. If the period is extended to 96 months, the monthly instalment drops to around R4 130 (R820 less). The average car ownership period in South Africa is around four years, at which point the customer will still owe R100 830 on a 72-month loan, compared to R152 950 if the car was financed over 96 months. At this point, a buyer who financed the car over 96 months may find that the trade-in value is less than the outstanding loan amount and may be unable to settle their current loan when they attempt to trade their car in for another vehicle.

So where does that leave car buyers? Is a longer-term loan (beyond 72 months) the way to go or not? Let’s consider the pros and cons.

The pros

Since these longer-term loans address affordability concerns, they alleviate cash flow pressure and can help buyers to enter the market even on a tight budget.

With lower monthly payments, a buyer may also qualify for a larger loan, allowing them to finance a more expensive car.

The cons

As mentioned earlier, the most significant drawback of a longer-term loan is the risk that the outstanding credit may exceed the market value at the point you want to trade in the vehicle, leaving you out of pocket for the difference.

You will pay more interest over the period of the loan (all else being equal). Because the outstanding loan amount falls at a reduced pace, the capital amount on which interest payments will be calculated will be higher at the same point in time (for example, 10% on R100 000 is more than 10% on R95 000).

The repair costs may also become a headache. Most warranties cover 100 000 km or three years. If you finance a vehicle over 96 months, it is more likely that you will have to cover repair costs from your own pocket after the warranty runs out.

We also find that default rates increase where customers finance their vehicles over longer periods of time, which negatively affect their credit score.

The verdict

We encourage customers to finance vehicles over shorter periods. As such, we prefer not to offer customers a finance term beyond 72 months when they apply for a car loan.

While affordability is an important consideration, we firmly believe that buyers – first-time buyers and buyers in the volume market in particular – should finance a vehicle over 72 months or less.

It is also important to consider the impact of the balloon payment (inflated final instalment). Financing a R250 000 vehicle over 72 months with a 30% balloon payment (12.5% interest, no deposit) will reduce the monthly instalment from around R4 950 to roughly R4 250, but will result in you paying much more interest over the six-year period.

By choosing something practical that suits your needs and paying it off as quickly as possible, you can save a lot of money over time, particularly during these difficult economic conditions we are facing as a country.

This approach can have a significant impact on your overall financial health and will stand first-time buyers in particular in good stead in the long run.

Faisel Mkhize is the Managing Executive for Vehicle and Asset Finance, Retail and Business Bank, Absa Group.

The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.

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Geez. Are there people that buy cars on a 8 year loan?

Pure and Simple Idiots / Ego boosters.
NEVER buy a car on credit : If you cant afford to pay cash ,then you cant afford that car : Its simple really .

Your argument is wrong. Tell me what younger person has the money to buy a car cash??

Agree. It’s about ego. And a balloon payment is a really bad way to buy a car. Why? Because in your monthly repayment, you’re also paying the FULL INTEREST ON THE BALLOON PART AS WELL!! For example, if you take out a car loan with a simple interest rate of 11.5% and a final balloon payment amount of R60 000, THE INTEREST CHARGED ON THE BALLOON PAYMENT PART AMOUNTS TO AN EXTRA R41 400! It’s a very expensive way to try and keep up with the Joneses or the Mantashes – who in turn are probably also heavily indebted themselves. I sold my Merc and bought a second-hand Jetta which gives me everything and more that my Merc did, and I was able to pay cash. No monthly repayments, no massive interest charges. A much better feeling than just swaggering around with ‘the badge’.

Yes, they are the ones parking a R500 000 car outside a R500 000 home.

no, for the same price of a R 500k home, they would be renting a R 1mil home. A bit more to show off…

…with no furniture

Yes it’s done everyday under the guise of a “Balloon Loan.” They have to refinance the balloon payment. The banks don’t like to tell you that. They even (in their marketing strategy) state, total cost of credit and they include the balloon payment that YOU WILL NEED TO REFINANCE BUT DON’T COUNT IT AS CREDIT IN THAT AGREEMENT! Dr. Debt Financial Fitness

Actually people buy on 20year loans through their home loan.

Yes, but this is for an appreciating asset, not a depreciating one. Important to know the difference.

@Dougalan, no I mean that they’re buying cars through the access bond on their 20 year home loan. 8 years is nothing if you can stretch it to 20 =)

I like the idea of paying for the time I’m in a car. While it is sitting in the car park at your office or in the garage while you’re at home, you are still incurring ownership costs for no direct benefit. The future in a first world country will probably be self driving vehicles running to and fro catering to transport requirements as and when needed. Parking in the cities will no longer be needed – hopefully freeing up space for more parks and recreation centres and homes for the needy. But that will be beyond my lifetime, specially while living in Africa.

not at all, within the next 8 years

I like the US model, 0% interest loans for vehicles.

Wasn’t aware you are allowed to do vehicle finance beyond 72mths?

This is an indication HOW POORER (in USD terms) South Africans have become in affording developed world goods…like cars….to compensate for reduced affordability, the industry just make the payment-term longer.

(….that’s must be one of the reasons why the over-priced local manuf industry survives in our protected market…just pay off the increasing purchase prices over longer terms. What a nice debt trap.)

It will be like paying off your box of breakfast cereal at 50c p.m. over 96months!! When the cereal has been consumed after 1 month, you still have 95months left to pay.

Problem is in our poor state of personal wealth, we should not be owning a car anymore….we should be walking, or get a lift on back of open truck….as this is how many Africans travel. Why are ‘we’ different in SA?? This is the PRICE WE PAY for wanting western, 1st world benefits in a 3rd world environment!

Your article is VERY VERY subjective. You mention a 72 month loan with NO MENTION OF THE WORDS “BALLOON PAYMENT!”So as the national credit regulator realizes these balloons are wiping people out as they CANNOT pay the balloon and they CANNOT get a loan on a car they owe MUCH more than what it’s worth at balloon payment time. Hopefully the National Credit Regulator will entertain my 23 years of teaching people how to get out of debt.I have mentioned this to people at the regulator BUT it seems they have new people all the time. Financial Fitness is the answer

The Article does mention balloon. See the 3rd last paragraph.

I doubt anyone reading here on money web would be so stupid…. The problem is the ones that do these kinds of things, aren’t the ones reading up about finance, investments and returns… There chosen reading is you, the son, cosmopolitan and astrology

I have seen people with no debt buying a R 180 000 house in 1998 and taking out a second, third, ……. loan for a deposit on ever more expensive cars and unaffordable lifestyle resulting in a total debt burden by 2008 of R 1 500 000 and a property valuation of approximately R 850 000.

Maybe it’s the start of a perfect storm. South African consumers are increasingly unable to afford new cars. This despite the ‘help to buy’, and ‘trade assist’ offers from the manufacturers. On top of that, there’s the discounts of up to 29% on some makes.

The next step is to extend financing. Balloon payments are already a problem, expect them to get worse. People are already loaning money to pay off the balloon value. In the past they would have traded the car in to cover the balloon and then get a new one, one a new loan. But the balloon values often exceed the value of the car.

There two important points: If you buy a car on a loan with balloon value, then that is too expensive for you to afford. Secondly, extending the loan repayments simply means that consumers will never be able to get rid of their car loan.

Sometimes it’s what the sales and finance team for on us. They made me buy a second hand car worth 120K over 6 years even though I could afford to pay the installment twice even with a 4 year term. Made up some nonsense about how I can increase it myself but we know by then they’ve charged R69x73.

Beware of 96 month car loans while only ‘considering’ impact of balloon payments. That is the worst advise ever. Take the 96 month car loan to reduce monthly repayments rather than the balloon and day of the week. But realise that neither are good options. However with the 96 month loan you can choose when to cancel the finance with little or no penalty.

Wouldn’t it be nice if we could all us public transport. No car worries no insurance or petrol. When I had my vechile finance through FNB I could deposit money into my car loan and it would earn interest. The idea is to trade up buying in cash

I read somewhere ( i think twitter) that the combined taxes on a new vehicle in SA are around 42% ( import, vat carbon)

Rather buy second hand from a private seller( finance available if not older that 5 years old) and save.

also don’t be intimidated with servicing yourself- youtube will tell you how and its as technical as replacing a light bulb and draining a bath in most case- even the luxury SUV’s

It begs the question, with services like Uber and Bolt, why does anyone need a car? It must surely be cheaper to run around with these chaps than to own a car, with all the added costs of interest, insurance and maintenance.

Jump in, jump out — let the other fellow worry about tyres, petrol, services, fender benders and the myriad other issues that come with owning a vehicle.

My 18 Y/O daughter is really upset with me. I tell her that driving is a skill that she is not going to need, and there is no idea to get her a car.
She ubers, costs me max R 1000 pm,

I absolutely hate cars and the whole motor industry.

End of comments.





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