Young South African car buyers digging themselves into a deep hole

Gen Z consumers were the largest growth drivers out of any age group in new vehicle finance contracts between May and June 2024, generating 18.1% year-on-year (YoY) growth in volume and accounting for a 16.8% share of new vehicle finance facilities (up 3.3% YoY), revealed credit agency TransUnion’s latest Credit Trends report.

However, while Gen Z buyers – who are classified as individuals born between 1995 and 2010 – are helping uplift a depressed sector, they are taking on a high level of risk to do so.

Earlier in 2024, Standard Bank noted that it experienced an alarming increase in consumers opting for sizeable balloon payments on their finance applications over the last five years.

In the period May 2023 to 2024 alone, approximately 33% of new Standard Bank vehicle finance clients chose to include the maximum balloon payment of 40% on their contracts.

Using the average new loan amount of R394,670 for a vehicle means that these motorists will still be on the hook for a lump sum of R157,868 after diligently paying their monthly dues for years.

Given that Gen Z buyers were the biggest contributors to car purchases in recent years, it suggests that they are the ones choosing these exorbitant balloon payments most frequently possibly without understanding the full consequences thereof.

“Given the current cost-of-living crisis, and the 15-year high interest rates in South Africa, consumers are looking for more ways to stretch their budgets. High fuel costs have added to consumer strain by pushing up vehicle ownership costs significantly in the past three years,” said Head of Standard Bank VAF Enablement, Glenn Stead, in June 2024.

“However, Standard Bank VAF has observed that some consumers don’t fully understand how this type of deal will affect them down the line.”

Naked car insurance excess percentages per age group

Additionally, recent data from Naked Insurance showed that 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.

A higher excess traditionally translates to a lower monthly premium, and vice versa, making it an appealing option for cash-strapped individuals.

However, should these drivers claim from their insurer, they may not be able to afford the excess if it is too high, which will lead to delays in the repair or replacement of their vehicle.

Naked’s figures revealed that car owners under 28 chose a 3.2% excess in July 2024, with the closest group being 28- to 35-year-olds who chose a 2.4% excess.

It is again possible that these younger consumers do not grasp the full consequences of their decisions.

“Excesses can be a source of frustration and confusion in the car insurance experience,” said Ernest North, co-founder of Naked Insurance.

“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.”

Faced with these statistics, TransUnion Africa CEO Lee Naik said that more must be done to educate younger consumers on intricate financial products such as vehicle finance to keep them out of financial trouble down the line.

“Although Gen Z represented a substantial growth engine for lenders, more needs to be done in financial literacy to help these consumers build strong credit profiles to qualify for and manage more complex credit products like vehicle finance,” said Naik.

Used cars in high demand

Taking a holistic view of the market, elements such as high interest rates and fuel prices weighed on consumer spending in Q2 2024, resulting in vehicle finance originations decreasing by 5% compared to the prior year.

“Vehicle finance remained in a soft market aligned to auto sector trends as new passenger vehicle sales for May and June 2024 performed dismally, falling 11.7% and 9%, respectively,” said Naik.

“Consumers increasingly turned to quality used vehicle options as affordability challenges regarding price and costs associated with financing remained high due to macroeconomic factors.”

Data from WesBank shows that demand for used cars now outpaces that for new cars by more than two to one.

Given these challenges, the most recent quarter experienced a further decrease in active accounts as existing borrowers begin to settle their debt facilities.

Performance remained relatively stable with serious account-level delinquency rates falling by 10 basis points year over year, highlighting payment priorities but also a shift in consumer preferences in recent years where many have opted to include a balloon payment.

“Balloon payments can make monthly repayments more affordable, but we encourage lenders to engage with consumers to make sure they fully understand the long-term impacts of this structure — which in turn will provide protection against the rising balance exposure within their portfolios,” concluded Naik.