The latest interest rate hike will increase the pain of South African consumers, especially for those paying off a financed car.
Following our recent report that new vehicle prices were under severe pressure due to the Rand's weak exchange rate (New Car Prices: Big Increases Coming), the South African Reserve Bank increased the interest rate by 50 basis points on January 28, resulting in an effective repo rate of 6.75%, with the prime lending rate now sitting at 10.25%.
“Given the current economic conditions this hike comes as no surprise. But it will not be welcomed by consumers,” says Rudolf Mahoney, Wesbank's head of brand and communication.
“Household budgets are under tremendous pressure. The interest rate has increased 175 (2.25%) basis points in 24 months, meaning those who have had car and home loans since the start of the rate hiking cycle will now really start feeling the effects.”
Those of you who have vehicle finance agreements (or any finance agreements coupled to the interest rate) with a linked interest rate should be notified of the recalculated monthly instalments shortly.
And what is the impact? Wesbank explains: Using an example of a vehicle that costs R250 000, financed over 72 months at an interest rate of prime plus 1.5%, the instalment amount at the start of January 2014 would have been R4 710 (at an effective interest rate of 10%, including all charges). Purchasing that same vehicle at today’s hiked interest rate would result in a monthly repayment of R4 935 – a difference of R225.
“Every time there’s a 25 basis-points hike a vehicle’s monthly instalment only changes by 20 or 30 Rand, but all those small hikes add up,” says Mahoney. “This is an excellent example of why we urge consumers to build some fat into their car-buying budgets.”
But, of course, it’s not only about cars, but also credit cards, home loans, clothing accounts etc. Consumers with additional debt will notice the increased repayments starting to significantly affect their budgets. Household debt levels in South Africa remain at high levels – with more than 75% of disposable income servicing debt.
Rising interest rates and inflation, brought on by a deteriorating Rand and compounded by the fallout of the national drought, will see buyers either postpone vehicle purchases, buy down or exit the new market altogether in order to find better value the used market.