How does the interest rate cut affect your car payment?

Many of us have vehicle finance costs, meaning that we have a predetermined contract in place with a finance house whereby we pay off our vehicles over a set period. An interest rate cut, provided you have a linked interest rate agreement with your financial institution, will mean lower monthly instalments for you, therefore leaving more money in your pocket.

As of June 2021, the annual AutoTrader mid-year industry report included that the average car searched for by South Africans came to R389 145, with an average mileage of 75 830km and a year model-averaged at 2016. When financing a car, the age of the vehicle, the credit history of the buyer and several other factors are taken into account when determining the interest rate.

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Working out the costs

The prime lending rate as reported from May 2022 was 8.25%, however, most finance deals will have a higher interest rate and others lower, depending on the individual's credit profile. We will be comparing the current lending rate versus the 8.75% figure from March of 2020, just before the country went into lockdown.

It is worth noting that generally speaking, a new car will have a lower interest rate than a used car, although a person with a good credit score may get a better rate on a used car than a person with a poor credit score may get on a new car, which is why we've taken the average and applied it to both. 

Working on the base points

Let's work with a six-year (72-month) loan period for both a new and used car, at an interest rate of both 8.25% and 8.75% along with a 10% deposit. We will be using the vehicle finance calculator on autotrader.co.za to get the figures.

With a set of base figures for both interest rates, we can determine how much the average consumer will save monthly on their vehicle while also representing the overall cost saving that a 0.5% reduction would have throughout the five-year period, in the unlikely event that the repo rate remains unchanged for half a decade.

Crunching the numbers on a car payment

We will begin with a new car, which at an average price of R389 145 minus a R38 914 deposit at the aforementioned interest rate over 72 months would equate to a monthly premium of R6 270 and a total interest amount of R101 190. If we then reduce the increase the rate by 0.5%, the figures are R6 184 per month with a total interest payment of R94 983. 

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This means that you will save an average of R252 per month and pay R15 085 less interest over five years. The R286 saving per month means an annual saving of R3 024, which could be enough to pay for your annual service or simply contribute to your fuel bill.

Verdict

While these figures appear relatively small, if we combine them with the reduction that many of us will have in terms of our housing bonds and other interest-rate-linked loans, we may just see thousands of additional Rands left in our accounts each month, which is good news for us all.

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