This afternoon I was posed with a question, which is incredibly important, but so very hard to answer:
“Would you like a 13.5 fixed or 11.5 linked interest rate on your motor vehicle?”
Before we explore further, let me just state that ‘fixed’ means that your interest rate won’t change, whereas ‘linked’ refers to an interest rate that is subject to the prime interest rate, ie. the economy – so if the economy does well, you’ll score, if it does badly, you’ll pay much higher rates.
I fired the question off to Twitter and @hiltontarrant, an SAFM presenter who was filling in on their MoneyWeb investment show, picked up on the question and decided to ask it live on his show.
The feedback was quite straight forward – Linked is like taking a risk, Fixed isn’t. Is one better than the other? Not necessarily, and on a 60month repayment period, it’s impossible to predict what the economy will be like in 5 years; However, with the 2010 World Cup underway, a great deal of fresh money is being pumped into our economy, which naturally strengthens things, which results in better interest rates. An interesting point was that in 1999 (I think that was the date) the interest rate shot to 25%, which could occur again and if it does, then a ‘linked’ interest rate would be very dangerous.
Based on the whole discussion and some more research, I decided to go with ‘linked’.
A good article entitled “Foreign buyers snap up SA stocks” on SA Good News, points out how much money international investors are investing in South Africa. It’s quite incredible and if this keeps up, our country should see good interest rates and a strong economy. I’m not a professional, but I think that’s the drift.
Thanks go out to Hilton for asking the question on the air!
You’re forgetting a VERY important piece of information. Basically interest rates are like a wave, they go up and down. These waves are generally linked to trying to promote spending or saving.
Low interest rates are there to promote spending. It’s not worth saving your money when the interest rate is low as you’re not getting much for your money and spending money is relatively cheaper. At the moment we have a “low” interest rate to promote spending and save people money who could not afford their interest rate related debt in this time. The converse is also true, when you have high interest rates the government is promoting saving as credit is expensive then.
I assume since you’re getting 11.5% you’d be linked at prime + 1?
As we’ve just got a new Reserve Bank Governor (who regulates the interest rate) it’s difficult to say what her policies will be.
On a fair assumption (hunch/guess/thumb suck) we can see that interest rates will most likely stay the same for the next six months as we’re just coming out of a recession and spending is considered the way to go. The interest rate is unlikely to go down much (if at all) but will most likely go up. So yes, you will probably save for at least 6 months (of the 5 years) but chances are the World Cup will promote spending and the interest rate will stay low for a while to come.
Bear in mind though, the costs or savings might be fairly negligible and depending on how much you want to spend a month, this might be a couple bucks here and there. Motivation to stop smoking :)
Finally, if the interest does go up it won’t necessarily affect the real income as due to the time value of money (money is worth less over time due to inflation) a couple of hundred rand will probably be the same as your salary/income goes up.
Hope that makes sense and guides your choice :)
The riskier option is to fix. You need to be very confident rates are going to start an upward trend in the next month maybe two, otherwise you’re going to lose more over the intermediate months than you save over the fixed months.
Thanks alot for this info. Im planning to buy a motorbike and I’m not too familiar with this interest thing. So thanks again
Thanks
Good input by SaulK and Al. The bank’s quote on a linked rate is actually involves a very complex calculation which takes into account even more factors than mentioned above, specifically also debt-risk (the chance that you will default).
Al is correct though, fixing is generally a bad idea. What’s smarter is to link, and then kill the debt faster if the interest rate DOES in fact rise to a ridiculous level. Forecasting interest rates is however almost impossible to do, but one can look at factors like SaulK’s mention of the new governor’s policies. For example: The unions wanted and have gotten the ANC to plan a complete re-look at economic strategy. What do the unions want? Cheaper money for the poor (thus lower interest rates). Is the new governor as strong-willed as Tito was? Possibly not… (but that’s a guess). So we might see low rates for quite a while… (another guess!!!)
Interest rate and total-cost-of-ownership calculations are fascinating to do though. I did a ton recently, and I as I’m sitting here waiting for my new car to be delivered :-)
Out of interest’s sake, which bank are you getting prime +1 with?
Wonderful comments, thank you everyone.
From asking a few more people, it would appear that “linked” is definitely the way to go at this point in time. Martin – you’re right about taking linked and then trying to kill the debt, that’s the ideal situation and one which I will be looking into, but darn, these vehicles are expensive, crunching debt isn’t easy when hurrying ;)
Wesbank offered 11% via VW and 11.5% via Audi. MFC and Audi finances came a little over those rates. I bank with FNB, so I prefer to keep it with them, and to be honest, my ST was via MFC and they put me on 17.5% – damn ignorance cost me a lot of money there!
OK, the good interest rate makes sense now :-) VW/Audi have got a very good working relationship with Wesbank, and finance is often subsidised as an incentive by the factory. It’s two-pronged: VW/Audi get more sales, plus Wesbank are happy with a lower rate in principle, because these vehicles retain their value better than the market average, so if Wesbank needed to repossess a vehicle, they’d get more of their cash back (you’ll see the pattern here, lower risk, lower interest rate).
It’s worth shopping around though, I do things through a trust and was offered prime +4.25 by Wesbank, even though we have an existing vehicle (VW) financed by them! Stannic bettered it with +1.5 (which is 12%). That’s on a Renault though, much higher risk to them of course than a VW/Audi :-)
I find this conversation really useful. But I am not convinced about going for a linked interest rate. Our recent history does not show an interest rate as low as the current 10.5, but rather the waves that Saul talks about. Therefore, with a repayment scheme of 5 or 6 years, surely we are likely to see a gradual rise over that period. From this point of view it would make sense to fix on the current low level. My dilemma is that Wesbank is currently offering me Prime plus 1 on linked or Prime plus 2 on fixed. What’s your advice on this offer?
Another question – how can you kill your debt on car finance as Martin suggests. From what I understand, if you take out a 60 month repayment agreement then you are locked into that time period. Is this what you guys understand? This is different it seems from a bond repayment. Wesbank told me that the only way of shifting the terms is to take out a whole new finance agreement with a different bank. Any comment on this?
Hi Richard,
I think vehicle financing agreements used to quite inflexible, but these days you’ll very seldom find this (unless your bank’s being particularlty difficult). You’ll need to check the fine print of your financing agreement before you sign it, but with mine I can “settle” (I hate the word) at any point. It’s not as flexible as a home loan where you can simply pay extra every month, but they shouldn’t hold it against you if you prop R20k against the loan once a year or so. For example, I’m just about to put R30k against my R170k agreement. Killing debt early naturally makes a *huge* difference to total interest paid!
linked at 10 % and fixed at 10.75 % , cannot decide , please help
I went with fixed as our economy is very hard to predict..
I’m a first time car buyer & the terminology still baffles me, from the ballon % & the types of interest, i’ve chose to go with fixed as it fits my budget – having to worry what my installment will be is not quiet ideal for me. thanks for the clarification, really helped!
No problem Futhi, glad things worked out for you :) I wish you many happy miles ahead!
I got 13% fixed with Wesbank, and paid extra cash every month to earn rebate interest, thus reducing my monthly interest. Linked interest is just risky
I’m busy buying a house and is very unsure if I should fix the rate or not. They offered me 9% variable rate. But it sounds like you can only fix it for up to 3 years. Any comments please?
@Alet – I’m unfortunately not an expert on this topic, but perhaps someone else will come and assist you..