The average time taken by consumers to settle their vehicle finance contracts has almost doubled over the past five years, according to TransUnion Auto Information Solutions.
This follows the implementation of the National Credit Act (NCA) in June 2007, which made it possible for consumers and banks to extend the repayment period beyond the previous maximum term of 54 months without any deposit.
The lengthening of the repayment term has significant implications for the new vehicle manufacturing industry because this trend will also result in a lengthening of the replacement cycle for vehicles.
Mike von Höne, the chief executive of TransUnion Auto Information Solutions, said last week that the average time taken to settle a new vehicle finance contract had been 25 months prior to the implementation of the NCA, but was now 43 months.
Von Höne said there were indications that this trend was starting to improve, as consumers began to regain better control of their financial situation and attempted to pay down their debts in the current low interest rate environment.
“Nevertheless, consumers continue to enter into longer period contracts, presumably in an attempt to make monthly repayments more affordable from a cash flow perspective.”
He said 51 percent of new vehicle contracts now fell into the 60- to 72-month bracket.
Wessel Steffans, the head of Absa Vehicle and Commercial Asset Finance, said consumers were addressing affordability constraints by lengthening the finance period, which enabled them to afford loan values that would not be possible over shorter terms.
Steffans said applications received and scored by Absa with a finance term greater than 60 months increased to 68 percent last month from 67 percent in July.
“What is of concern is that the percentage of applications received with a term longer than 60 months is increasing each month. Pretty soon all the applications we receive will be for terms longer than 60 months.
“This is negative because it lengthens the replacement cycle and keeps new vehicle buyers out of the market for a longer period. But it’s a way for customers to afford a car. South Africans like their cars and will buy as much car as they can and extended terms are a way for them to do that,” Steffans said.
Steffans said the longer replacement cycle trend on new vehicles would be exacerbated if an increasing number of balloon or residual payments were allowed on 72 month finance contracts but requests for residual values or balloon payments last month remained stable month-on-month at 14 percent of applications.
Chris De Kock, the executive head of sales and marketing at WesBank, said the FirstRand subsidiary recorded 8 percent year-on-year growth in credit applications last month to the second highest number of applications in the past seven years.
“Our data also shows that the transaction value has increased slightly, suggesting consumers are not migrating to cheaper cars,” De Kock said.