Troubling car instalments when finances bite

It might be too early to tell how bad the coronavirus pandemic and shutdown of industry and commerce will affect people’s ability to settle their debts, because the economic impact is expected to last much longer than only the few months of lockdown.

As far as defaults on car instalments are concerned, finance houses and their customers are apparently managing the crisis quite well for now, with banks rolling out plans to give relief to people who suddenly could not work and earn an income.

Lebogang Gaoaketse, WesBank’s head of marketing and communications, says the bank has seen significant uptake of the Covid-19 payment relief options offered since the start of the pandemic.

He discloses that up to the end of May, WesBank had provided assistance to more than 66 000 customers involving in excess of R350 million.

However, one cannot help but notice that WesBank and other banks reserve this kind of relief for customers in good standing – and only to counter the effects of the pandemic.

‘Sound banking behaviour’ a prerequisite

“Our interventions continue to assist customers who [have] demonstrated sound banking behaviour, such as having honoured their repayments to the bank on a consistent basis prior to Covid-19,” says Gaoaketse.

Trevor Browse, managing executive at Nedbank’s vehicle financing division MFC, says the bank offers three-month payment holidays if any proof of loss (or partial loss) of income due to the pandemic can be demonstrated.

“To date clients were offered a three-month payment holiday, and clients in arrears were assisted proactively too (provided they could prove loss of income directly attributable to Covid-19),” said Browse in response to questions about the bank’s efforts to help stressed clients.

Absa Vehicle and Asset Finance offers a payment relief programme that is “available to all account holders who were in good standing, but had encountered financial difficulty”.

Faisal Mkhize, managing executive of Absa Vehicle and Asset Finance, says the unprecedented spread of Covid-19 has had wide-reaching consequences for individuals, businesses and communities, many of whom are the bank’s clients.

Absa clients also on board with relief offers

“A substantial proportion of our customers opted for payment relief, which is indicative of the financial difficulties that consumers currently experience,” says Mkhize. “The total relief that was extended to [our] customers is in excess of R2.2 billion.”

The relief took the form of an adjustment to credit agreements by revising the loan period and capitalising the interest over the relief period to assist customers who experience cash flow problems.

Absa notes that it did not charge additional administration fees for this work. However, the bank also noted that the payment relief did not apply to customers already under debt review, and that existing arrangements had to be adhered to in these cases.

Where is the money coming from?

The fact that banks “only” offered payment holidays by extending the term of repayments and effectively burdened customers with more interest will probably attract lots of criticism, but it is important to remember that it is not the bankers’ money.

Loans are predominantly financed with money deposited by other clients, who might be saving for their old age, university fees for their children or a new set of teeth.

In essence, a bank’s first responsibility is to the depositors who entrust their money to the bank – which responsibility precludes generous debt relief and somewhat limits the possibilities.

Shareholders, which include just about anybody contributing to a pension fund or life insurance policy, are the first to shoulder the losses.

A few banks have already warned shareholders that earnings will fall by more than 20% in the current reporting period and others are bound to follow as bad debts are expected to increase.

Don’t delay, speak up

Banks caution their clients to make contact immediately if they run into financial difficulty. Says Gaoaketse: “It’s very important that customers who experience financial challenges which hinder them from keeping up with payment obligations get in touch [immediately]. WesBank is always available to consult with the customer to find a suitable and feasible solution to the matter.”

Nedbank notes that it is in the best interest of clients to try to make some kind of payment arrangement and to try to avoid legal proceedings.

“If income and affordability is a challenge, we emphasise and recommend that the client should consider selling the car through an assisted-sale process, helped by a motor dealership,” says Browse.

“Voluntary restructuring [of] the shortfall is far more preferable to all parties than a court order and sheriff repossession. We also advise clients of the benefits of applying for debt relief or debt counselling.”

Repossessions expected to rise

He says Nedbank has not seen an increase in repossession of vehicles, but this may be because courts and licensing offices are not open at present. “But naturally, with an increase in consumer stress and job losses, sadly, it is an eventuality that repossessions will increase as experienced in the 2008/2009 credit crisis. We only expect this to start happening between July and November.”

Another option is that people could consider trading down to a smaller, more affordable car, advises Browse.

“We have seen that many people are wanting to trade down, for example, move from a SUV to a hatchback for financial and cost-of-running reasons during the crisis. This is a difficult thing for a motor dealership to achieve as often the used large car is worth more than a smaller car, so the dealership has to actually pay in to facilitate the deal,” says Browse.

This might be difficult, because dealers have cash flow problems after being shut for a few months.

The same cash flow problems make the repossession of vehicles and eventual selling on auction difficult. Currently, dealerships have large stock, no cash and few customers.

Interestingly, WesBank says it has recently seen an increase in buyers at car auctions due to an increase in demand for used vehicles – and no noticeable fall in prices.

According to Nedbank’s experts, used cars are sometimes seen as countercyclical and become more popular during difficult times when people cannot afford to buy new. This tends to support prices in the used-vehicle market, as does a decline in the exchange rate, which makes new cars more expensive.

Absa’s Mkhize has the last word, saying that this is a difficult time for everybody. “We urge customers who are in a position to continue making their payments to do so,” he says. “Those payments will enable us to extend assistance to those who are in a challenged position.”

It obviously also makes sense for the individual to avoid additional interest charges.