Alternative vehicle financing products are set to play an increasingly important role in the South African market to address the deterioration in vehicle affordability among consumers caused by vehicle price inflation, higher interest rates and under-pressure household budgets.
WesBank CEO Ghana Msibi said an example of the deterioration in vehicle affordability is the increase in vehicle finance deals with balloon payments at the end of the financing term to 39% in 2023 – from 11% in 2010.
“That statistic tells you a lot about how people are effectively utilising balloon payments to improve affordability,” he said on the sidelines of the Festival of Motoring last week.
The rate of increase in new vehicle prices was once again exceeding the inflation rate in the second quarter of 2023, according to TransUnion.
TransUnion Africa CEO Lee Naik said the vehicle market remains in flux due to frequent power cuts, ongoing increases in the repo rate and various other factors influencing the total cost of vehicle ownership.
Naik said that with the rising cost of vehicle ownership and consumers having no positive equity in their current vehicles, it is increasingly burdensome for consumers to upgrade their vehicles.
“Faced with limited options, they’re turning to older used vehicles that are more affordable, vehicle rental options, or staying out of the market completely. This trend is likely to continue in the near term,” he said.
Keeping up with the Joneses
Despite deteriorating vehicle affordability, Msibi said South Africans also have to ask themselves whether they are purchasing a vehicle within their affordability levels.
“There are more [Mercedes-Benz] AMGs driving in South Africa than [in] Germany.
“That must tell you something about the country. And the number of Porsches, Ferraris, Lamborghinis and Rolls-Royces we sell! If you think they are cash [deals], they are not,” he said.
Msibi said consumers are also addressing affordability issues by extending the term of vehicle finance deals, with deals now concluded with terms of 96 and 108 months.
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Finance deals with such a long term mean consumers are out of the market for a new or used vehicle for an increasingly long time, resulting in fewer people to whom dealerships can sell vehicles.
Msibi said the breakeven point on vehicle finance deals “is now literally north of 50 months”.
“All of sudden, you have to keep that vehicle for five years just to break even.
“And what we have noticed with South Africans is that they want to change their car every three years. It’s not a problem if you can afford it, but some people want to change their vehicles in 12 to 18 months.
“Some people don’t even renew their licence discs. That is how quickly they change their vehicles,” he added.
“They can do it the first time round and can probably do it the second time around, but the financial consequences remain, and that hangover with interest becomes quite problematic. That debt just doesn’t go away.
“Before you know it, they now start to look at all these funny structures to get into a vehicle just to keep up with the Joneses next door,” he said.
The ‘pay to use’ alternative
Msibi stressed that lengthy vehicle finance deals with balloon payments are not sustainable.
He believes alternative finance solutions and products, together with a change in the mindset of consumers towards paying for utilisation, will turn around this scenario, adding that ‘pay for utilisation’ comes in a number of permutations.
“It’s not only rental or leasing. It’s also subscription models. A lot more is going to emerge that we are going to start to see as alternatives for people to be able to use the vehicle,” he said.
Msibi said the compound average growth rate in the cost of vehicle ownership has increased by 6.7% over the last 10 years while the effect of interest rate hikes since 2012 until this year has increased the monthly instalments of a R800 000 vehicle finance contract from just less than R15 000 per month to R25 000 per month.
He said this has resulted in the buy-down trend in the new vehicle market and higher sales for more affordable vehicle brands, such as Chery, Haval and Suzuki.
“People used to frown on these brands, but that has gone out of the window as people have started to rethink brand loyalty.
“Brands such as Mercedes and BMW are suffering in terms of sales numbers because the total cost of ownership by far outpaces the growth in real income,” he said.
The 2023 Automotive Export Manual revealed that Suzuki Auto accounted for 8.9% and Haval Motors South Africa 4.3% of total new vehicle sales of 529 562 in South Africa in 2022.
Msibi said if the cost of utilities, such as electricity and school fees, is taken into account, consumers are in trouble.
“That is the reality, and you don’t have to look too far to start to see now how most of the dealerships are starting to offer rent-to-buy solutions in the new and used car space,” he said.
Msibi admitted the takeup of pay-for-usage vehicle deals has been “really slow” but indicated many vehicle dealerships are approaching WesBank now for floor plan financing for rental solutions.
Toyota South Africa had launched a product called Kinto rent to own in South Africa, while WesBank has a few guaranteed future value leasing products.
Msibi said although the takeup of its guaranteed future value leasing product has been very slow, it has even done some deals for Porsche models.
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He said rental and vehicle leasing deals currently make up less than 5% of WesBank’s monthly finance deals, but their target is to increase it to at least around 30% in the next five years.
“If we can get that takeup higher, we can deal with the vehicle finance deal duration and affordability issues.
“We are not going to get new customers in bucketloads, so if you don’t sort out that piece, you will continue to lose more and more people out of the system.
“I think that [rental, private leasing] figure should be as high as 50%. That will simply mean we are able to recycle customers into deals into the future whereas today we get you in incorrectly and we don’t even know if we will get you back in the next four or five years’ time, which is a problem,” he said.
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