The party is over for car buyers as rate hikes hurt

Growing numbers of car buyers are begging for credit extensions and debt counselling as inflation, rising interest rates and skyhigh fuel prices undermine their ability to pay for their vehicles, say banks.

Though vehicle repossessions appear to be fairly stable, there are fears that they could increase in coming months.

Many of those asking for help are customers who bought in 2020 and 2021, when interest rates were rock bottom.

Cyril Zhungu, Standard Bank’s head of automotive retail finance, says many asked their banks for linked finance rates, which move up and down with the prime rate — the minimum interest rate commercial banks charge their customers. Gambling that rates would go even lower, they opted against a fixed rate. It was not a wise move.

In 2020, prime fell as low as 7%. Now it’s 9.75%, and climbing. Some banks think it could reach 11% by January. The result has been a marked decline in disposable income and the ability to continue paying for vehicles.

Zhungu says the number of Standard Bank customers entering debt review has grown by just over 11% since mid-2021.

Charl Potgieter, Absa’s head of vehicle and asset finance, says: “We have seen an increase in the number of customers in distress applying for loan restructures.”

Zhungu says most of the pain is being felt by buyers at the lower-priced end of the market. “It’s our bread-and-butter customers who are suffering most.”

WesBank marketing head Lebogang Gaoaketse says those who are struggling include customers whose finance periods are coming to an end but cannot afford the balloon payment required to conclude the deal.

Balloons are effectively a deposit in reverse. Instead of paying a lump sum at the start of the deal, buyers pay it at the end. The payment can be as much as 30% of the purchase price.

Buyers often don’t factor it into their budgets. “Customers don’t plan sufficiently for these situations,” Gaoaketse says.

When the’time comes to settle, they dont have the money and ask for a new credit deal to pay the balance. But there’ sa potential catch. He says: “Extensions to contracts mean that we must score the customer again for affordability. This could result in the extension being declined.”

The Experian consumer default index, a quarterly review of the SA credit environment, reports that vehicle credit defaults in the second quarter of this year were higher than a year earlier.

The message to be drawn from the latest report, says Potgieter, is that the cost of living has increased significantly, leading to increased inability of consumers to meet debt obligations, and therefore fewer people who qualify for new credit. “Recently, signs of deterioration in the quality and affordability of applicants are setting in.”

Absa’s vehicle credit impairment charges increased to R1.175bn in the first half of 2022, from R755m a year earlier. The credit-loss ratio increased to 2.24% from 1.58%.

None of this stops consumers from continuing to apply for credit. While some banks report reduced demand, others say it’s booming. Industry-wide, fewer than half of applications are successful.

Even successful applications may require customers to buy smaller, cheaper cars than they originally wanted.

Banks say that when bad debt does occur, they try to help consumers reschedule their

commitments. Vehicle repossession is a last resort. “It’s in noone’s interest, not ours or the customer’s,” says Zhungu. He thinks the repossession rate will rise in 2023.

Gaoaketse hopes he’s wrong. “Repossessions are less than 5% of our total book, with a steady decline since the beginning of this year.”

Whatever happens, banks say consumers must also help themselves. The longer they refuse to face their debt problem, the harder it will be to fix. “It is very important that customers who experience financial challenges … get in touch with us immediately,” says Gaoaketse.

Potgieter says: “We encourage customers facing financial distress to proactively contact their credit providers to make an arrangement or help the customer exit the vehicle finance arrangement.”