Emerging consumer trends in vehicles finance

The continued pressure that consumers face to make their monthly household budgets balance has resulted in two emerging trends in the way vehicles are financed. Firstly WesBank has seen a substantial increase in the use of balloon payments, as well as the extension of finance repayment terms in order to lower monthly instalments.

“Consumers should be cautious and fully empowered with all the correct information when structuringtheir finance contract over an extended term, or when including a balloon payment. It is critical to understand the full set of risks and rewards in order to make an informed decision,” says George Nyabadza, General Manager Marketing at WesBank.

A balloon payment is a pre-agreed value of the loan which is only due at the end of the finance agreement. During the term of the agreement, the consumer only pays off the interest attracted by the deferred amount, without reducing the capital amount. As a result it reduces the consumer’s monthly instalments and in so doing, improving their cash flow. However, there is a risk involved, If the consumer does not have the necessary cash available to pay the balloon amount at the end of the agreement. The only other option is to trade in or sell the vehicle, however ifthe realisable value of the vehicle is not equal to, or greater than the balloon payment, the consumer will be caught short and potentially be left in financial difficulty.

“Consumers should therefore take a conservative approach when structuringtheir finance contract to include a balloon payment. Not only does it reduce the risk of a shortfall, but it will also allow one to reach a financial break-even point sooner”, urges Nyabadza.

WesBank has also seen a remarkable shift in the term over which consumers choose to finance their vehicles. Since the introduction of the National Credit Act, consumers have consistently extended the period over which loans are repaid – in many cases now up to 72 months. Consumers should not only be aware of the fact that the interest paid over an extended term is substantially higher, but also that the maintenance and ownership costs of an older vehicle increase exponentially.

“Therefore ensure that the vehicle has a comprehensive warranty product in place to cover the cost of anymechanicalbreakdown that might occur once the manufacturer or dealer warranty expires” advices Nyabadza.

WesBank further encourages consumers to preserve their vehicles, which are valuable assets by ensuring that they are serviced regularly in order to maintain resale values, especially if financed over an extended period.

“Under no circumstances should consumers be tempted to discontinue their comprehensive insurance cover either, as in the event of a total right off due to theft or an accident, the consumer remains liable for the full outstanding debt on his/her finance agreement”, concludes Nyabadza.