South Africa’s Generation Z is increasingly entering the car finance market, but many young buyers are making financial choices that could lead to substantial debt. TransUnion’s recent data reveals that Gen Z saw the highest growth in financing contracts for new vehicles, with an 18.1% year-over-year increase from May to June 2024. While this surge shows enthusiasm for car ownership, it also raises concerns over the financial risks some young buyers are assuming.
Balloon Payments and Their Financial Impact
A trend observed by Standard Bank shows more buyers opting for balloon payments—a large final payment due at the end of the loan term. Nearly a third of new vehicle finance customers chose balloon payments of up to 40% in the past year, meaning that, for an average vehicle loan of R394,670, buyers could face a substantial remaining payment of about R157,868. This approach may seem like a budget-friendly option, but many young buyers might not fully grasp the long-term financial impact these payments can have.
“Many are trying to manage tight budgets in the face of high interest rates and inflation,” says Glenn Stead, Head of Vehicle and Asset Finance Enablement at Standard Bank. However, he cautions that while balloon payments can lower monthly costs, they can lead to significant financial strain when the final payment is due.
Insurance Decisions and Financial Literacy
Insights from Insurance show that younger buyers are choosing higher insurance excesses to reduce their monthly premiums. While this might appear cost-effective, it can lead to financial challenges if an accident occurs and they’re faced with high out-of-pocket costs. Data from July 2024 indicates that buyers under 28 selected an average excess of 3.2%, higher than the 2.4% selected by the 28-35 age group. This trend suggests that some young buyers may not fully understand the trade-offs involved in insurance policy structures.
“Higher excesses can complicate the insurance experience, but with the right knowledge, consumers can strike a better balance between savings and risk,” explains the co-founder of Insurance.
The Call for Enhanced Financial Education
Lee Naik, CEO of TransUnion, stresses the importance of financial education for young consumers. Gen Z represents a valuable market segment for lenders, but Naik emphasizes the need for more education around vehicle finance to help these buyers make informed choices. “By improving financial literacy, young buyers can establish robust credit histories and make responsible decisions about vehicle financing,” Naik explains.
Preference Shifting Towards Used Cars
The overall vehicle finance market has seen a 5% drop in new originations over the past year. Rising interest rates and fuel costs are prompting consumers to choose high-quality used vehicles, with demand for pre-owned cars now outpacing new car sales by a rate of over two to one.
In this evolving landscape, lenders have a responsibility to educate buyers on the lasting implications of financing options like balloon payments. While they offer a way to lower monthly payments, understanding the risks is key to maintaining long-term financial health.
