Economic pressure has hit the South African consumer where it hurts, leading to falling vehicle sales and longer vehicle finance contracts.
Automotive consultant and managing editor of Double Apex, Sudhir Matai, says that with consumers forced to keep their cars for longer, knowing the differences between a warranty, a service plan and a maintenance plan can have a significant impact when it comes to keeping the car in top condition and ensuring its future value.
New car sales are expected to drop by 1% year-on-year, says Wesbank CEO Chris de Kock. “South African consumers have become prudent with their personal financial planning, thanks to erratic fuel prices and high inflation – both dictated by the exchange rate. This is evident in buying patterns, with data showing consumers either delaying purchases or buying downwards, moving out of the premium market and into the mainstream segments,” he says.
De Kock notes that 95% of car purchase agreements finalised by Wesbank are now 72-month contracts, spread over six years, and of those, 35% include a residual or balloon payment. A residual or balloon payment is a lump sum that is not included in the six-year instalment repayment plan and falls due at the end of the 72-month period. Consumers then have to either refinance the car or have the cash available to settle the amount – or sell the car in the hope that the trade-in price they are offered for it will cover the residual amount. Residual values typically range between 25% and 35% of the value of the car.
“This points to the limited affordability in the market,” says De Kock. “There hasn’t been a decline in the number of vehicle finance applications we receive, but there has been a deterioration in the quality of applicants – with affordability being the number one problem, followed by impaired credit records.”
Matai says that if you are buying a car that is just a few years old, it may include the balance of any warranty and service or maintenance plan that was purchased by the original owner. “Remember that details of each plan will vary between manufacturers and it is important to read the fine print before you buy a service plan or maintenance plan so that you know what is covered,” he cautions.
Marius Neethling, manager of underwriting at Santam, explains the difference between the three products.
Manufacturer’s warranty: Most vehicle manufacturers will provide a warranty on a new vehicle that should cover any manufacturing defects related to the original components, mechanical or electrical, for a certain period after the purchase date of your vehicle. Warranties may differ from one manufacturer to another, but the warranty period is usually for three to five years, or applicable for a limited kilometre distance. Hyundai’s seven-year warranty is one of the longest available on the market. Warranties usually cover the cost of repairs to parts such as the gearbox, water cooling system or head gasket and other large parts in the motor engine. Matai notes that warranties are also contingent on you servicing your car at a specific dealership. Thus, if you have the car serviced by your friendly mechanic down the road the warranty becomes null and void because the car was not serviced at the recognised dealership.
Service plans: A service plan will cover the cost of routine vehicle services, usually annually or when a particular mileage is reached, and includes labour costs. Items that are covered in the cost of a routine service include air filters, oil filters, fuel filters, lubricants such as oil, spark plugs and coolant. Any other repairs that may be required will be for the vehicle owner’s account.
Maintenance plans: Maintenance plans cover the cost of regular services (including labour) as well as the cost of repairs to parts caused by wear and tear. These plans provide cover for parts such as brake pads and break discs, shock absorbers, battery, windscreen wipers, globes and fuses.
Neethling warns, however, that a vehicle warranty or service or maintenance plan will not cover you for any damage to your vehicle in the event of an accident. You would still need to ensure that you have an insurance policy to cover your vehicle against accidental loss, theft, hijacking or damage caused by extreme weather events such as hail.