South African consumers are increasingly opting for longer vehicle loan monthly repayment periods in order to afford new cars.
Sydney Soundy, managing executive of Absa Vehicle and Asset Finance, said on Wednesday that 52% of vehicle finance applicants were now applying for contract periods longer than 60 months to aid affordability of more expensive vehicles.
This growing trend highlighted the risks of default on loans and reduced trade-in values.
Year on year, Absa financed about 25% more cars for the first two months of this year compared to the same period last year.
Soundy said there was a growing trend of consumers applying for longer vehicle finance contract periods.
Extending the period slowed down the redemption of capital with the results that a consumer remained locked into a specific contract longer.
“Good advice is to buy a vehicle that can be affordably paid off in as short a period as possible,” Soundy said.
Soundy also said 55% of its vehicle loan applications put no deposits upfront.
The combination of longer repayment periods and no deposit increased the risk of default, he said, adding that affordability of new vehicles was not expected to deteriorate.
“The factors that should continue to lend support to consumer household consumption include the expected growth in the economy; a more favourable inflation environment; and the expectation for nominal incomes to continue to rise modestly,” Soundy said.
“Consequently, growth in instalment sales and leases is expected to improve further after being on a rising trend in 2010,” he said.
“Based on the fact that many consumers are still highly indebted and finding it difficult to extend credit for higher priced vehicles, demand for good quality used vehicles will remain an important factor in the industry,” he said.
The debt-to-income ratio, he said, was expected to remain at current levels of almost 79%.
“This will be the result of expected rising credit growth that is further buoyed by current stable and relatively low interest rate levels that have improved debt servicing costs to levels of just under 8%,” Soundy said. — I-Net Bridge