Fix the in­ter­est rate on your ve­hi­cle­fi­nance con­tract

Weekend Witness - - Opinion -

MANY South Africans haven’t cap­i­talised on the op­por­tu­nity that low in­ter­est rates bring, ac­cord­ing to Cyril Zhungu, gen­eral man­ager of Wes­Bank’s mo­tor di­vi­sion.

Mo­torists could have been mak­ing cost­ef­fec­tive choices when struc­tur­ing their fi­nance con­tracts, said Zhungu, and could have saved lots of in­ter­est by opt­ing for fixed rather than linked in­ter­est rates.

“While the 0,5% in­ter­est­rate in­crease has ruf­fled con­sumers back to the re­al­i­ties of their debt, it shouldn’t be con­sid­ered alarm­ing,” said Zhungu.

“For ev­ery low, there is a cy­cle that will in­vari­ably end in a high, and the past 18 months have been the low of the in­ter­est­rate cy­cle.”

When con­sid­er­ing a monthly mo­bil­ity budget, there are some ar­eas that re­main pos­si­ble to con­trol.

The cost of a ve­hi­cle is ef­fec­tively made up of four key ar­eas: the cost of main­tain­ing it, in­sur­ance, fuel and the ac­tual in­stal­ment on the fi­nance con­tract for the ve­hi­cle it­self.

Main­te­nance costs are gen­er­ally be­yond an in­di­vid­ual’s con­trol, said Zhungu.

These are ei­ther cov­ered by a ser­vice or main­te­nance plan, or re­quired ex­pen­di­ture, when some­thing goes wrong.

“In­sur­ance costs can be com­pet­i­tively man­aged if you shop around, but re­main at a req­ui­site level,” he said. Op­er­at­ing costs rely on a dic­tated fuel price (which has dou­bled in price from five years ago), which can be man­aged to an ex­tent by care­ful travel plan­ning, but daily com­mut­ing is usu­ally an en­forced ba­sic. “Add ad­min­is­tra­tion fees, such as li­cenc­ing and, for some, tolls, and mo­torists have lit­tle room to man­age these costs other than to pre­pare for fur­ther ag­gres­sive in­creases,” said Zhungu.

“What con­sumers do have more con­trol over than many imag­ine, is the ac­tual fi­nance con­tract to pur­chase their ve­hi­cle. And the golden op­por­tu­nity re­mains to cap­i­talise on low in­ter­est rates by fix­ing the rate.”

Fixed in­ter­est­rate deals pro­tect against fu­ture in­ter­est­rate hikes by keep­ing them at the low lev­els South Africans are cur­rently spoilt with.

“Let’s face it, there is an ex­tremely small chance that in­ter­est rates can get any lower,” said Zhungu.

“This pro­vides some form of se­cu­rity against monthly in­stal­ments in­creas­ing be­yond af­ford­abil­ity lev­els in the years to come.”

The aver­age price of new ve­hi­cles fi­ nanced through Wes­Bank in­creased to R246 536 in De­cem­ber, 2013.

Based on a tra­di­tional fi­nance con­tract of a 10% de­posit over 54 months linked to prime, the 0,5% in­ter­est in­crease trans­lates into a R53,09 in­crease in in­stal­ment. “But con­sider that the sav­ing over the pe­riod of the loan is R2 866,46 and the ben­e­fits be­gin to be­come clearer,” he said. Con­sider a more ex­treme ex­am­ple, such as that ex­pe­ri­enced in Turkey, where in­ter­est rates have dou­bled from five per­cent to 10%, and the im­pact be­comes more ten­able.

On a five­per­cent in­crease in in­ter­est rates, a tra­di­tional mo­torist would sud­denly ex­pe­ri­ence a monthly in­stal­ment in­crease of R545,90 and be spend­ing R29 478,28 more over the pe­riod of the con­tract.

New ve­hi­cle prices are ex­pected to con­tinue in­creas­ing, per­haps even more ag­gres­sively than con­sumers have ex­pe­ri­enced, con­sid­er­ing the weak­ness of the rand, he said.

More than 70% of new cars sold lo­cally are im­ported or as­sem­bled from im­ported parts, and there­fore are af­fected by the weak­en­ing rand. The fuel price should also be ex­pected to con­tinue in­creas­ing. “So if you’re con­sid­er­ing buy­ing a new ve­hi­cle, take the op­por­tu­nity to con­tain your monthly mo­bil­ity ex­pen­di­ture by fix­ing the in­ter­est rate,” said Zhungu.

PHOTO: STOCK.XCHNG MORE EX­TREME EX­AM­PLE

The road to hap­pier mo­tor­ing could lie in fix­ing the in­ter­est rate on the pur­chase of your new car. OP­ER­AT­ING COSTS

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