How the Repo Rate Affects Vehicle Finance

Following the South African Reserve Bank’s (SARB) recent reduction of the repo rate by 25 basis points to 7%, many consumers are asking how interest rates practically impact car loans. Leading vehicle and asset finance provider, WesBank has stepped forward to unpack this relationship and what it means for both new and existing vehicle finance agreements.

The repo rate is the interest rate at which the SARB lends money to commercial banks. Changes to this rate directly influence the interest rates banks offer to consumers: the prime interest rate. When the repo rate rises, banks face higher borrowing costs, often resulting in increased loan interest rates for consumers. Conversely, a lower repo rate makes it cheaper to borrow and may lead to reduced loan repayments.

The SARB uses interest rates to manage, amongst other economic factors, inflation with a target band. This ultimately impacts citizens across the board. “More specifically, the repo rate plays a significant role in determining vehicle finance affordability,” says Lebo Gaoaketse, Head of Marketing and Communication at WesBank. “Understanding how it works empowers consumers to make informed decisions when purchasing or managing their car loans.”

Fixed vs linked interest rate vehicle finance

WesBank highlights two key types of interest rate structures in vehicle finance:

• Fixed interest rate vehicle finance: As its name suggests, a fixed interest rate agreement means your interest rate remains unchanged for the duration of the loan term. Irrespective of any changes to the repo rate, monthly repayments stay the same. Fixed rates provide stability and peace of mind but may come with slightly higher initial interest rates. They are a good option in a low interest rate environment to take advantage of potential future savings should interest rates increase later in the loan term.
• Linked interest rate vehicle finance: This option ties your loan’s interest rate to the prime lending rate, which fluctuates in line with changes to the repo rate. While repayments can decrease during periods of falling rates, they also rise when the repo rate goes up. When interest rates are high, linking your lending rate to prime offers the potential of some reprieve should interest rates drop, but ultimately allows your monthly instalments to fluctuate with overall economic trends.

“Choosing between fixed and linked interest rates depends on your financial situation and appetite for risk,” adds Gaoaketse. “Each option has its advantages, and our consultants are available to help customers select the right fit for their specific situation and needs.”

To illustrate, consider a linked interest rate vehicle loan of R300,000 over 72 months with no deposit nor balloon payment:

• At the current prime lending rate of 10.5%, monthly repayments would be approximately R5,725.
• At the beginning of the year when interest rates were 0.5% higher, the monthly instalment would have been R5,802.
• While the change in the monthly repayment amount might seem small in this example (just R77 per month), the saving over the full period of the loan could be as much as R5,532.

For fixed-rate customers, repayments remain unchanged regardless of changes in interest rates.

WesBank encourages consumers to take proactive steps in managing their vehicle finance:

1. Review your loan agreement to understand if your interest rate is fixed or linked.
2. Budget for potential fluctuations if your loan is linked to the prime rate. Your monthly instalment could go up or down.
3. Explore refinancing options in a lower interest rate environment to save money over the loan term.
4. Speak to a WesBank consultant for personalised advice on managing repayments during changing economic conditions.

“Interest rates are an important factor in South Africa’s economic landscape, affecting all indebted consumers,” concludes Gaoaketse. “Whether on a fixed or linked finance agreement, the repo rate will impact the agreed interest rate on your loan. At WesBank, we are committed to helping customers navigate changes with confidence and make decisions that best suit their financial goals.”