Data from Naked Insurance shows that South African car buyers under the age of 28 are more likely to choose higher excesses on their insurance policies to reduce monthly premiums than any other age group.
An excess is described as the lump sum of money you will have to contribute towards an insurance claim.
For example, if your excess is R3,000 and your car is damaged in an accident, you will contribute R3,000 to repairs, regardless of whether the repairs cost R4,000 or R40,000. This also applies when the vehicle is stolen.
A higher excess traditionally translates to a lower monthly premium, and vice versa, making it attractive for cash-strapped consumers to opt for a more substantial excess amount.
However, there is a big risk attached to this. Should you have to initiate a claim from your insurer, you may not be able to afford the excess if it is too high, which will lead to delays in the repair or replacement of your vehicle.
“Excesses can be a source of frustration and confusion in the car insurance experience. But if you understand how the excess in your policy works, you can adjust the amount to hit a sweet spot between reducing your risks of a loss and saving money on your monthly premium,” said Ernest North, co-founder of Naked Insurance.
“Our data suggests that younger customers often opt for a large excess to lower their monthly premium because cash flow is tighter. Many older customers, on the other hand, choose to reduce their excess because they have experience with owning assets, having insurance, and making claims. Among over-55s, excesses tend to be slightly higher because they usually have older, less valuable cars than those under 55.”
The table below, provided by Naked, shows the excess chosen as a percentage of the insured car’s value for various age groups:
Another alarming statistic recently brought to light by Standard Bank is South African car buyers, who are increasingly getting younger, are choosing exorbitant balloon payments on their finance contracts to make their monthly repayments more palatable.
A balloon payment can reduce monthly car finance payments by a considerable amount.
It works like a deferred debt that consumers can move to the end of their finance contract, with the monthly instalments then being calculated on the principal debt minus the deferred debt, explains Head of Standard Bank VAF Enablement, Glenn Stead.
However, it can put you on the hook for a massive lump-sum payment at the end of the finance agreement which you will have to save up for.
If you can’t afford it, you will have to re-finance the balloon, which will see you paying off the same vehicle for several more years.
Overall, new-vehicle purchases that included a balloon payment have increased by 41% in the past five years, Standard Bank’s data revealed.
In the last year alone, approximately 33% of Standard Bank customers opted to include the maximum balloon payment of 40% on their finance contract.
The combination of an excessive balloon payment and a high insurance excess has the potential to create an affordability crisis for younger motorists should they suddenly be required to pay both within a short period of time.
Keeping your head above water
To safely manage their expenses, Naked Insurance’s North recommends that young consumers consider the impact of a high excess and their capacity to afford it.
“If you can pay for small repairs out of pocket without derailing your financial plan, then a lower premium and higher excess might make sense for you,” said the insurance expert.
Additionally, if you drive less than the average person, your chances of having a bumper bashing will be lower. You might therefore be more comfortable with a higher excess. Conversely, if you drive more than most commuters, a lower excess is a wise choice.
If you have spare money left over at the end of the month after taking care of all your expenses, it might also be wise to allocate it to your car insurance payment to reduce your excess responsibilities.
Likewise, Standard Bank’s Stead notes there are several avenues one can follow to avoid getting cornered by a balloon payment.
The best way is to purchase a more affordable car that will adhere to your spending limits without having to opt for a balloon payment.
Otherwise, you can make additional, non-contractual payments towards the balloon payment, but you must explicitly request that your credit provider to allocate these payments to offset the balloon amount.
Finally, you can sell the vehicle before the balloon is due. When doing so, all outstanding debt is settled as part of the trade-in process.
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