Increased budget pressure from increased rates
South African interest rates will increase for the third time this year, placing indebted consumers under more pressure while the South African Reserve Bank (SARB) attempts to rein in inflation.
The SARB’s Monetary Policy Committee announced a 50 basis points increase to the repo rate, from 7.75% to 8.25%, making the prime lending rate the highest it has been since 2009 at 11.75%.
The latest interest rate hike will increase the pain of indebted South African motorists, especially those paying off a financed car on a linked rate.
“While the latest interest rate hike is not a surprise, given the current economic headwinds, its implications will not be welcomed by consumers,” says Lebogang Gaoaketse, WesBank's Head of Marketing and Communication.
“Household budgets remain under tremendous pressure and those who have had car and home loans since the start of the rate hiking cycle, post COVID-19, will now really start feeling the effects.”
What is the impact? Gaoaketse explains: “Using an example of an entry level vehicle that costs R250 000, financed over 72 months at an interest rate of 11,25%, the installment amount at the start of May 2023 would have been R 4 882,73. Purchasing that same vehicle at today’s hiked interest rate would result in a monthly repayment of R4 947,56 – a difference of R64,83.
"While these incremental increases to the installment seem small, their compounding effects add up over the lifetime of the finance agreement,” says Gaoaketse. “The customer will now be spending an amount of R4 667,76 over the 72-month term due to the move in the interest rate, bringing the interest amount of that vehicle to R100 000. This is why we urge consumers to carefully consider the affordability of their vehicle choice within its whole ownership cost and their broader household.”
The impact of the interest rate hikes since the relief experienced by consumers during COVID-19 has a greater effect and it is these increases that really begin to impact consumer debt in the longer term. The compounding effects of interest rate increases on car, home, credit card and other debt repayments, is beginning to weigh heavily on consumers. Household debt levels in South Africa remain at high levels – with more than 62% of disposable income servicing debt.
Rising interest rates and inflation, brought on by a deteriorating Rand and compounded by the power-supply crisis as well geopolitical concerns, will see buyers either postpone vehicle purchases, buy down or exit the new market altogether in order to find better value in the used market.
According to Gaoaketse, affordability will now become a key consideration in the purchasing decision for consumers.
"As the market faces economic challenges, the bank remains committed to helping its customers navigate these uncertain times. With a dedication to customer support, we go to great lengths to assist those who may be struggling. While the repossession of a customer's vehicle is an unfortunate situation, we are proud to report that we have not witnessed a surge in repossessions. Instead, the business is focusing on providing flexible repayment options and extending assistance to ensure customers can retain their vehicles for as long as possible.”
Gaoaketse goes on to expand on this and says that in response to the current economic climate, customers are actively seeking alternatives to alleviate financial pressures. Many are opting to purchase vehicles that offer comfort and impressive technological features at an accessible and affordable price point. We observe that some customers are turning to more budget-friendly options without compromising on quality or convenience.
“WesBank is committed to continuing this extended assistance in the short term, offering a range of options to address their unique circumstances. Whether customers choose a vehicle with all the bells and whistles or an entry-level model, we remain committed to supporting them through these challenging times,” concludes Gaoaketse.