“The person who doesn’t know where his next rand is coming from usually doesn’t know where his last rand went.”
Owning a vehicle in South Africa is a necessity. The fluctuating petrol price and current rising cost of living makes this a financially difficult decision. Statistically, “Between January and March 2021, 4.1% of vehicle loans were defaulted on.” (Top Auto, 2021) Vehicles are repossessed every day, and yet every day new vehicle loans are made.
Where is the disconnect and how can you safeguard this vehicle purchasing process with the least amount of financial danger?
In this article, we will cover the various options that you have for purchasing a vehicle to what rights the law has if you default on your payments. If you understand every corner of the process, you are better equipped to handle the actual costs of purchasing a new vehicle and to ensure you never have to worry about your car being repossessed.
In the fourth quarter of 2020, the average loan amount for vehicle finance in South Africa was R320 183,00 (BusinessTech, 2021). But this once off cost will not be the only cost you pay. Running a car is not cheap. And to top it all off, once you drive that shiny new expensive car out of the dealership, it immediately loses between 9–11% of its value. And up to 20% of its value in the first year, and so it continues. Ouch.
A vehicle is a depreciating asset which means that from the moment you purchase your vehicle, its value begins to drop.
Therefore, your decisions need to be as realistic to your affordability as possible.
You have three options to purchasing a vehicle in South Africa:
- Cash purchase
- Vehicle Finance
- Personal Loan
The cash purchase option is preferred. The vehicle is yours and you do not owe any money to the bank. There is no interest to pay each month and the only further costs you will incur are the ‘extra costs’ of owning a vehicle which we discuss below.
Vehicle finance can be obtained through many credit providers, including banks across the country. Vehicle finance carries a lower interest rate as it is considered a secured debt, meaning they can take the vehicle away if you don’t pay.
A balloon payment can be opted for on vehicle finance to bring your monthly repayments down. However, a balloon payment is not always the best option. These balloon amounts are hefty amounts which need to be paid in full when the repayment term comes to an end. Another option would be to carry the balloon payment over to a new car payment, thereby remaining in debt.
Watch ‘Everything You Need to Know About Balloon Payments’ on our Money Moves with Debt Rescue Channel to find out more.
Some consumers choose a personal loan instead of vehicle finance to purchase their vehicles. Unfortunately, a personal loan is seen as unsecured debt. Unsecured debt carries far higher interest rates than vehicle finance, making your total repayment amount greater. It is never a good idea to purchase a car with a loan if possible. You will pay around 20% more in interest.
Rent-to-Own options are popular but excessively expensive. There are two varieties of rent-to-own in South Africa: 6-month commitment and a month-to-month commitment. Rent-to-Own is not vehicle finance and depending on your personal agreement your payments could far exceed the value of the car. You are paying for convenience.
Extra Costs Over and Above Monthly Repayments
Many consumers see the price tag on a monthly repayment option and in their budget, that amount may be doable. However, regardless of the option, you choose to purchase your vehicle there are certain ‘extra costs’ which should be considered. These costs are:
- Vehicle insurance
- The fluctuating petrol price
- Car service fees which can cost anything from R10,000 upwards
- Wear and tear on the car
- Licence renewal fees
- Fines (hopefully not!)
If you want to purchase a vehicle on finance, you will need to have the following in order:
- Your credit score needs to show the affordability of the vehicle – download your free credit report here.
- Your ID document
- A valid driver’s licence
- Proof of Residence
- Proof of Income
In 2021 2.3 million consumers in South Africa had vehicle finance and approximately R4.3 billion rand was in arrears (BusinessTech, 2021). Affordability changes. Life happens and as we have seen over the past few months, inflation and interest rates can radically increase. This fluctuation in the economy puts many consumers in a position where they default on their repayments.
Car repossession does not happen overnight. There are a series of steps which credit providers usually take. Please remember that each credit provider has its own time frames before repossession which should be outlined in the fine print of your vehicle finance agreement.
Approximately 20 days after a defaulted car payment, your credit provider will send you a letter giving you a timeframe in which your payment must be made. If this payment deadline is missed, you will then be issued a summons. A summons means that a court will decide whether repossession is necessary and when they do, your credit provider will come to collect your vehicle.
This is not the end though. Repossessed vehicles are auctioned for the credit provider to make up for the outstanding balance on your account. But depending on the final sell price, you may still be liable for the outstanding balance. Repossession does not mean that you do not have repayments anymore. It means you will lose your vehicle and you will still have to repay the amount owed to the credit provider.
Buying a car in South Africa is risky. There are many costs to consider. There are also many avenues to slip up and lose your car. Debt Rescue can help you keep your asset depending on the nature of your circumstances. WhatsApp Debt Rescue now to see how we can help you keep your head above deep water.
Since 2018, Debt Rescue has been at the frontlines assisting over-indebted South Africans. Debt Rescue has managed to help thousands of consumers achieve financial freedom through the debt review process. Contact us now to see how you too can manage your debt affordably.