As inflation continues to outpace salary increases, South Africans are increasingly opting for longer vehicle finance contracts and many are taking on a residual value of 30-35% as well.
A Broll retail report for the second quarter of last year showed that real salaries rose at an average of 4.9% per annum. However, when adjusted for inflation, salaries should have grown by 6.7% per annum for people to earn the equivalent, in terms of buying power, of what they earned in 2008.
Against this backdrop, Wesbank CEO Chris 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.
“The value of the balloon payment or residual that falls due at the end of the six-year contract can vary, but it typically stretches out the repayments so that the consumer has a smaller monthly instalment,” he says.
For example, using the Wesbank affordability calculator, if you bought a car for R200 000 with a 10% deposit of R20 000 and a repayment term of 54 months, the monthly repayment at an interest rate of 12% would be R4 428.23. If, however, you financed the same car over 72 months with no deposit and a balloon payment or residual value of 30%, the monthly repayment at an interest rate of 12% would be R3 429.63.
De Kock says previously, when consumers were taking out 54-month vehicle finance contracts with a 10% deposit, the point at which the outstanding finance amount intersected with the resale value of the car was usually around 36 months. However, with longer car finance contracts plus a residual value, there is a steeper depreciation curve and the point where the outstanding finance amount intersects with the resale value of the car is now typically around 48 months or when the car is four years old.
Ghana Msibi, Wesbank’s executive head for sales and marketing, warns buyers to be cautious of the amount put into a balloon because they will be responsible for the lump sum once the finance term is finished.
“While it may be attractive to have lower monthly repayments because a larger chunk of the purchase price is placed into a balloon, the repayment of a balloon can be an unexpected debt as this amount will either need to be settled or refinanced at the end of the deal,” he says.
Msibi adds that of the Wesbank consumers who take out contracts with a residual amount, only 5% opt to refinance the vehicle at the end of the initial hire purchase contract period. The other 95% either pay off the lump sum, trade in the car before the contract expires, or negotiate a repayment agreement such as paying off the residual amount over three months.
Henry Botha, head of strategy and business analytics at Absa Vehicle and Asset Finance, points out that the ‘residual value’ is just a deferred payment for a portion of the capital – 30%, for example – and allows for a lower monthly instalment. “The client is still responsible for repayment of 100% of the capital amount,” he says.
Prem Govender, managing partner at CP Naidoo & Partners, says consumers tend to forget that a car is a depreciating asset.
Impact on your asset
“At the end of a longer hire purchase contract, you are left with an asset that is not worth anywhere near what you paid for it and you still have to cough up a residual amount of 30 to 35% of the original price,” she says.
“Consumers who take out these contracts rarely have a lump sum saved up at the end of the period to cover the residual and, more often than not, resort to refinancing their older model vehicle, which is now out of warranty and service plan, with increased maintenance costs.”
Govender also points out that when you take out a longer repayment contract, you end up paying more interest in the long term.
For sound personal financial planning, Govender suggests that buyers rather consider a maximum repayment term of five years without a residual amount, and save first so that they have a lump sum deposit of 10% to 20% when buying the vehicle.
Another tip: “If you have equity in your home loan, you can use an access bond to pay cash for the car at the dealership. However, if you choose this option, make sure that you structure your repayments into the home loan such that you pay off the cost of the car within five years or less.
“The interest rate on a home loan is significantly less than that on a vehicle,” she says.