Car buying habits to change

MOTORING NEWS – Vehicle finance periods could be extended even further than the 84-month maximum some institutions are offering as car buyers try to reduce monthly instalments amid rising prices and costs.

The National Credit Act in 2007 lengthened average vehicle finance periods in the local automotive industry from less than 50 months to about 70 months. Some financial institutions are now offering terms of up to 84 months.

Although consumers tend to trade out of these contracts early when buying a new vehicle, a further increase in the average contract period could have meaningful interest implications for vehicle buyers. It could also compel them to keep vehicles for longer as it will delay the break even point in the finance period when the outstanding loan amount will be equal to the trade-in value of the vehicle.

TrendsStatistics from Standard Bank Vehicle and Asset Finance show how the percentage of vehicle finance applications with deposits have decreased over the last two years, while the percentage of applications with balloon payments (residual values) and the average contract term have surged.

Nicholas Nkosi, head of vehicle and asset finance at Standard Bank, says some people are still able to trade in their cars and obtain a deposit for the next one, but this number is declining. He expects the average contract duration of around 44 months (from contract to settlement) to shift slightly in the coming months. “So undoubtedly people are going to keep their cars longer,” he said.

New vehicle sales have come under increasing pressure in recent months as disposable income has decreased. Standard Bank now expects total new vehicle sales to decline by 3% this year (2013: 650 745) while new passenger car sales could drop almost 5% to 429 749.

Against the current grim economic backdrop the buying-down trend, initially fuelled by the downturn, is also expected to persist.
Nkosi says while consumers are buying smaller, more fuel-efficient cars there are still first-time buyers entering the market. Small cars (0 to 1,7-litres) accounted for 67% of the total passenger market last year. This was up significantly since 2010. Fuel price increases have also contributed towards the buying-down trend.

Standard Bank says petrol and diesel prices have respectively increased 287% and 417% since January 2001. Since January 2010, prices have risen 83% (petrol) and 89% (diesel).

Hybrid car sales are contracting after a sharp increase between 2010 and 2012, although off a low base. Nkosi says hybrid cars are still expensive and the average buyer is not in a position to afford them. The fewer new hybrid models being introduced has also dampened sales, he says.

There are also fuel-efficient options available in the traditional car market as technology improves.

Steven Barker, head of secured lending at Standard Bank, expects “a tougher environment” during the next 18 months when more interest rate hikes are expected. He says consumers are still highly indebted and indebtedness in a rising interest rate environment depresses economic activity. “Although overall vehicle sales growth is expected to be negative this year it shouldn’t be as drastic as during the financial crisis,” he says.