96-month vehicle finance … welcome to repayment hell

As South African consumers battle with affordability due to high inflation, record-high interest rates and a broadly weaker currency over time (impacting the cost of imported goods), credit providers are offering vastly extended loan terms to make purchases more ‘reasonable’ – in theory, at least.

The terms for vehicle finance offers have slowly stretched from a ‘standard’ 60-month term to 72 months, which is increasingly the ‘default’ on any finance offers.

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These also include balloon payments in an attempt to further drive down the monthly repayment amount. So a six-year loan is now the norm with seven-year ones starting to be promoted on certain vehicles/brands.

However, vehicle finance contracts on offer from banks can now stretch to as long as 96 months (in the case of WesBank).

Balloon payments aren’t allowed on finance terms longer than 84 months (seven years) and these are only available for vehicles less than two years old.

Absa still limits terms to 72 months.

Capitec highlights an “extended loan term of up to 84 months to pay” via specific partners (the limit is 72 months for vehicles purchased at WeBuyCars). Its vehicle loan differs from standard vehicle finance options as “the loan is unsecured, meaning that you own the vehicle from day one”.

A 72-month loan for a R500 000 car (with a somewhat generous interest rate of 13.75% and no balloon payment) will mean an instalment of R10 300. Shorten this to 60 months and repayments are closer to R11 700. But extend the term to 84 months and the monthly payment is R9 400.

The buyer will pay R50 000 more over the lifetime of the loan.

Quite what state the car will be in after eight years is anyone’s guess …

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Phones

As the price of smartphones has soared thanks to a weaker rand, contracts now run for 36 months as a matter of course. And this isn’t confined to the ultra-high end where an Apple iPhone 15 Pro Max (256GB) or Samsung Galaxy S24 Ultra retail for around R30 000.

Every single promoted offer for a phone in the latest deal sheet from MTN has a 36-month contract term.

Some networks even offer 48-month contracts these days. An Apple iPhone 15 Pro Max 256GB on Vodacom’s Red Core 6.5GB Plan + 200 minutes top-up contract costs a whopping R110 less per month on the longer term (48 months at R1 289 per month versus 36 months at R1 399).

Imagine paying for a phone contract until the iPhone 18 comes out …

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Home loans

Where things get really crazy is with 30-year home loans (the standard term is 240 months). To avoid so-called reckless lending, banks and finance institutions will only grant a term of 30 years (360 months) to buyers who will be able to settle it before they hit retirement. These would mostly be first-time homeowners.

According to data from mortgage originator ooba, there has been a steady uptick in 30-year mortgages processed for first-time buyers. Capitec’s home loan product, offered through SA Home Loans, runs for 10, 20 or 30 years. SA Home Loans says the 30-year product is “for new buyers” (under 45 years old) and that “the longer loan term allows you to enjoy a lower monthly instalment”.

At an ‘indicative’ interest rate of 10.9%, the monthly repayment amount on a mortgage for a R1 million home over 20 years will be R10 254, with a total repayment of R2.5 million (R1.5 million in interest).

Stretched over 30 years, the monthly instalment will be R9 500, with a total repayment of R3.4 million – almost R1 million in extra interest.

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Because of the ultra-long duration of a 30-year home loan, it is incredibly likely that an entry-level homebuyer using this product will have only paid interest by the time they decide to sell and upgrade (easily within the first eight to 10 years).

According to the Reserve Bank, South Africans are using nearly two thirds of their monthly income to service debt. With absurd terms like these that make no sense for the underlying asset, the situation is unlikely to improve.

Welcome to repayment hell.

This article was republished from Moneyweb. Read the original here.