How the repo rate impacts vehicle financing agreements

The way that the repo rate impacts consumers who have financed their vehicles via an instalment sale depends on whether the financing agreement is based on a fixed interest rate or a linked interest rate.

Following the South African Reserve Bank’s (SARB) recent reductions of the repo rate, with three cuts this year, customers are left wondering how interest rates practically impact on their car loans.

A vehicle loan is an amount given to you by the bank to repay over a stipulated period. Those repayments include a portion that goes towards the amount you borrowed as well as portion for interest, which is what the bank charges you for lending you the money.

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 that banks offer to consumers, which is the prime interest rate. When the repo rate rises, banks face higher borrowing costs, which results in increased loan interest rates for consumers. Conversely, a lower repo rate makes it cheaper to borrow money and results in reduced interest rates and loan repayments.

The way that the repo rate impacts consumers who have financed their vehicles via an instalment sale depends on whether the financing agreement is based on a fixed interest rate or a linked interest rate.

A fixed interest rate

Fixed interest rate vehicle finance means that your interest rate remains unchanged for the duration of the loan term. Irrespective of any changes to the repo rate, the monthly repayments remain the same. Fixed rates provide stability throughout the contract period along with peace of mind as they do protect consumers should the repo rate and interest rates be increased during the loan period. A fixed interest rate is a good option in a low-interest rate environment as they allow consumers to take advantage of potential future savings should interest rates increase during the loan term.

A linked interest rate

A linked interest rate vehicle finance agreement ties your interest rate to the prime lending rate, which fluctuates in line with changes to the repo rate. While payments can decrease during periods of declining rates, such as what South Africa is currently experiencing, they will 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 go up, but ultimately allows your monthly instalments to fluctuate along with overall economic trends.

As an example, a linked interest rate vehicle loan of R300 000 over 72 months with no balloon payment at a prime lending rate of 10.5% will have a monthly repayment of approximately R5 703. At the beginning of 2025 when the interest rate was 0.5% higher the monthly repayment would have been R5 779. While that might seem like a minimal amount at R76 per month, over the contract period it results in a difference of as much as R5 472.

Be proactive about vehicle finance

If you have an existing loan agreement, review it to understand if your interest rate is fixed or linked. If you are looking to finance a new car, make sure that the interest rate included in the contract is in line with your preferences, whether fixed or linked.

If your loan is linked to the interest rate, it is important to budget for potential fluctuations as your monthly instalment could go up or down.

Consumers who are stuck with a fixed interest rate can also explore refinancing options in a lower interest rate environment, such as the current South African trend, which could result in a saving over the loan term.

The innovative Motus Select vehicle finance calculator allows consumers to easily calculate how various interest rates impact their monthly vehicle repayments.