Bad news for motorists with car loans in South Africa

The South African Reserve Bank (SARB) has voted to increase the nation’s interest rates by 25 basis points.

As a result, the repo rate has been raised to 7.0%, while the prime lending rate has increased to 10.50%, adding pressure to motorists taking out car loans.

The SARB’s Monetary Policy Committee (MPC) voted to hike interest rates amid inflationary pressures stemming from the war in the Middle East.

The decision was not unanimous, as four members voted for the hike while the remaining two preferred to keep rates unchanged.

“The committee agreed that inflation risks had intensified, and that the challenge of large and overlapping shocks would likely trigger second-round effects, requiring a monetary policy response,” Reserve Bank Governor Lesetja Kganyago said.

“Our decision was aimed at managing risks and ensuring that inflation returns to target.”

This verdict comes after Statistics South Africa reported that Consumer Price Index inflation rose to 4% in April, a significant jump from 3.1% in March.

Inflation is currently at the upper end of the SARB’s policy, which allows for a 1% tolerance band above its target of 3%.

The primary cause of all of this is the Iran war, which has caused global oil prices to skyrocket past $100 per barrel over the last two months.

Consequently, petrol and diesel prices have reached record highs of over R26 per litre and R32 per litre, respectively.

The latter is particularly devastating, as diesel prices affect the cost of transporting goods, with knock-on effects across the economy.

Kganyago explained that the CPI increase was due to the largest fuel inflation jumps on record.

While this was slightly offset by a stronger currency, he said the MPC still sees upside risks to inflation and forecasts that headline inflation will average 4.4% this year and 3.7% next year, only dropping to its target of 3% in 2028.

“These projections entail some second-round effects, as the shock broadens out into wages and inflation expectations,” Kganyago said.

“At this early stage, we do not have clear confirmation of these effects in the data. New results from our main survey of inflation expectations will only be available next month. However, market indicators and analyst expectations are edging higher.”

For motorists, the 25-basis-point increase translates into higher monthly instalments on vehicle loans.

The following table shows how much the new prime interest rate of 10.55% will affect your monthly car finance instalment, based on a 72-month contract with no deposit or balloon payment:

Car loans are getting longer in South Africa

Motorists are taking out longer finance agreements in an attempt to keep up with the rising cost of vehicles in South Africa.

This is according to Lightstone Auto, which highlighted that the vast majority of car purchases made over the last decade have extensive payback times.

The average car loan in South Africa now spans 72 months (six years), which is reflective of the broader cost-of-living crisis.

Many households are downsizing from two cars to just one, and the payment periods for those cars have gone up substantially over the last 10 years.

A longer finance contract means that the monthly instalments owed on a new car are smaller, which brings a measure of short-term economic relief for individuals living paycheck to paycheck.

However, it also means that consumers are paying more for their vehicles over the long term, as lengthy finance plans lead to significantly more interest that needs to be paid off on top of the vehicle’s purchase price.