Reading Time: 3 minutes

Longer Loans

With the price of vehicles and even mobile phones shooting up, while people’s income has stagnated it seems that credit providers and retailers are having to offer longer loans just to get consumers to buy.

Cars

Vehicle finance terms in South Africa have stretched considerably.

In the past, a 60-month loan was the standard, but now banks like WesBank offer terms up to 96 months. Capitec, through certain partners, extend vehicle loans of up to 84 months. ABSA still limits car finance to 72 months.

Stretching the loans over longer repayment times means the monthly payments are within reach for more people. Adding things like balloon payments (at the final month of the agreement) and slashing the need for deposits can also make the offers seem more tempting.

 

The problem is that those extending the payments over longer time periods, means you end up paying a lot more in interest and fees. You also end up paying off an aging asset (or liability in some people’s books) for a lot longer.

Phones

Smartphone contracts have followed a similar trend.

Once limited to 24 months, most phone plans now are offered over 36 months, with some networks now offering up to 48 months to pay.

How long do the batteries last again? They may not last as long as the repayments do.

Many phones are now so expensive they cost much more than a laptop or desktop computer, in some cases, more than a second-hand car!

While extending the contract has the same effect of reducing monthly payments, the total cost adds up over time. Buyers may still be paying for their current phones long after the next model (or two) is already available.

Less Each Month is Better, Right?

These new extended loan terms, whether for vehicles or phones, can psychologically make purchases feel affordable in the short term.

For many people they are becoming the only way they can afford to have new products or vehicles.

The problem is that the long-term financial impact is significant, as consumers end up paying so much more for the same items than they would with shorter loan terms. The banks and retailers of course, end up making more, but also face greater risk of defaults over time.

When taking out a contract or any credit, always consider the total repayment amount for the whole contract period, and not just the amount you will pay each month.