Generation Z in South Africa—those born between 1995 and 2010—has become a key player in the vehicle finance market. Between May and June 2024, this demographic fueled an 18.1% year-on-year growth in new vehicle finance contracts, now accounting for 16.8% of the market, according to TransUnion’s Credit Trends report. While this growth signals a positive trend for the automotive sector, it also introduces notable financial risks for young buyers.
1. Understanding the Pitfalls of Balloon Payments
One growing concern among Gen Z car buyers is the frequent use of balloon payments. Standard Bank’s data indicates that from May 2023 to May 2024, roughly 33% of new vehicle finance clients opted for balloon payments, which could represent up to 40% of the car’s value. With an average loan amount of R394,670, these buyers face a potential debt of R157,868 after years of regular payments, often due to a limited understanding of
balloon payments’ long-term impact.
2. The Impact of Rising Costs on Young Car Buyers
Glenn Stead, Head of Standard Bank VAF Enablement, explains that high inflation, rising interest rates, and increasing fuel costs are making vehicle ownership more challenging. This economic climate has led many young buyers to overlook the financial burden balloon payments can create over time, which could have lasting effects on their finances.
3. Insurance Decisions and Financial Literacy Challenges
Insurance trends among Gen Z drivers show a preference for policies with higher excesses to reduce monthly premium costs. According to Naked Insurance, drivers under 28 chose an average excess of 3.2% in July 2024, compared to 2.4% for those aged 28-35. Ernest North, co-founder of Naked Insurance, warns that while this may help with short-term savings, it can also lead to financial difficulties if a claim is needed.
4. The Call for Improved Financial Education
In light of these challenges, Lee Naik, CEO of TransUnion Africa, emphasizes the need for better financial education for younger buyers. A solid foundation in financial literacy can help Gen Z consumers develop strong credit profiles and make more informed decisions about complex financial products like vehicle finance.
5. Growing Preference for Used Cars
As new car affordability declines, the demand for used vehicles has increased. WesBank reports a notable shift, with quality used vehicles being twice as popular as new cars, driven by high interest rates and fuel costs. In Q2 2024, vehicle finance originations fell by 5% year-on-year, further underscoring the cost-related hurdles in the new car market
Conclusion:
Although young South Africans are expanding their presence in the vehicle finance market, it’s essential for them to understand the financial risks associated with balloon payments and high insurance excesses. Enhancing financial literacy will empower Gen Z buyers to navigate the complexities of vehicle ownership and make informed choices that can prevent future debt.
