During the Covid-19 pandemic, there was a shortage of new cars on the market leading to excessive markups and fewer discounts, and some consumers were happy to pay these bloated prices as it meant they could skip the waiting lists and get a new set of wheels immediately.
Now that the pandemic is a distant memory for most motorists and the market has largely recovered to pre-pandemic conditions, many of these individuals are starting to think about selling their vehicles but finding out they still owe much more than what their cars are worth despite spending years diligently paying their monthly instalments.
“We’re still dealing with the post-Covid hangover,” explains Chantellé Henning, Head of Finance and Insurance at used-car platform getWorth.
“There was a shortage of new cars, which pushed up used-car prices as well as the cost of new cars since there were fewer promotions and discounts. Low interest rates and affordable repayments enticed many buyers to add extras to their vehicles, which increased their initial loan amounts. The auto market was in a mini-bubble, and consumers buying at that time began their car loans with a high base.”
Henning referenced a recent case where a client approached getWorth to sell their premium 2022 car. The company informed them that their vehicle had a market value of around R500,000, and they were shocked to discover that they still owed R700,000 on it.
“We often get enquiries from customers needing to sell their cars but struggling with negative equity,” she said.
“Even though getWorth offers excellent prices, it doesn’t always clear the loan. Without the necessary funds to cover this difference, their options become severely limited.”
Keeping your head above water
Owing more on your vehicle than it is worth is referred to as being “underwater.”
This is a common theme in South Africa where getWorth estimates that around one in five motorists are currently stuck in this situation.
Fortunately, Henning said that it is not all doom and gloom in the car market.
“Used-car prices didn’t crash, but rather returned to their normal behaviour of falling as a car ages and adds mileage,” she said.
“Also, while the used car market was in the doldrums in mid-2023, it has been picking up again recently.”
The financial expert provided the following tips for car buyers to help them keep their heads above water:
- Consider buying a used car instead of a new one
- Choose car brands that are known for keeping their value well
- Choose a shorter loan term without a big final balloon payment
- Keep your car for longer until you have paid off enough of your loan
- Avoid adding unnecessary extras to your loan, like certain types of insurance
- Examine carefully what is being offered as part of the package and cross out anything you don’t need
- Don’t roll the shortfall of your current car loan into a new car deal, you’ll have to pay it off eventually
- Be mindful of adding too much mileage to luxury cars, as this can make them lose value faster than you can pay off the loan
“By following these tips, you can better manage your car loan and avoid financial stress,” concluded Henning.
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