In the current economic climate, with skyrocketing car prices and increasing living costs, many consumers are fearful of being turned down for credit.
Brian Joss – As the market leader, with more than four decades of experience in vehicle finance, WesBank has five sure-fire tips for consumers who want to have success when applying for vehicle finance.
Whether it’s a house, credit card or a new vehicle, banks are bound by law, through the National Credit Act (NCA), to ensure that consumers can afford the financial commitments into which they enter. While credit should never be used for consumers to live beyond their means, it can be a necessity – as is the case with financing a car, which is one of the biggest financial commitments they can make.
While there’s no guarantee that a customer will be approved for vehicle finance, there are best practices to follow, which will help improve credit health and greatly increase the chances of being granted credit.
- Establish your affordability
The first step in calculating your budget is finding out how much you can afford to spend on a car. To do this, simply take your income (after taxes and deductions) and subtract all living expenses. Food, rent, airtime, TV subscriptions and more – all of these costs must be deducted from your total income to arrive at your disposable income. This is the money that can be used for luxuries – or essential credit, such as monthly car instalments.
Doing this budget exercise at home gives you a clear picture of how much you can spend on car instalments – you can even use the WesBank affordability calculator to help you. When you eventually submit your vehicle finance application online or at a dealership, you will already have this breakdown at hand for the bank to assess if you can indeed afford the loan repayments.
- These extras aren’t optional
Affording a car isn’t just about the monthly instalment. If you have R5 000 left after paying all monthly expenses, you will have to use that amount to cover the instalment as well as other essentials. Fuel and insurance for example, are monthly expenses that need to be budgeted for. If your vehicle doesn’t have a service plan or maintenance plan you should also consider saving money each month to cover regular maintenance costs.
These items form part of the cost of motoring, and they should be included in your budget when submitting your finance application. If your budget leaves room for these costs, you’ll definitely improve your chances of being approved for a car loan.
In general, WesBank advises allocating between a half and two thirds of your budget to the vehicle instalment, with the remainder of this amount allocated to the additional costs. For example, if you only have R5 000 for buying a car, about R2 500 should be used for an instalment, with the other half going towards fuel, insurance and maintenance.
- Save up for a deposit
If you’ve shown the bank that you can budget responsibly, you’ll really impress them with a deposit. While it’s not absolutely necessary to pay a deposit, doing so can be in your favour. Paying a deposit reduces the amount of credit required for the transaction which, which means lower monthly repayments and improved affordability. Your ability to afford the monthly repayments is one of the biggest drivers when banks assess your finance application.
Financial responsibility reflects well on your credit profile and goes some way to ensuring your finance application will be approved.
- Settle as many debts as possible
Your credit profile shows banks how you use credit. This includes clothing accounts, overdrafts, home loans, personal loans, and credit cards. As long as you make your monthly payments on those accounts, your credit profile will be spotless and banks will see that you’re a reliable borrower.
According to the NCA there are two main types of credit agreements. The first is a credit transaction such as a personal loan, which is taken out and paid off over a certain period. With each payment, the outstanding balance reduced over the period of the loan.
The second type of credit agreement is a credit facility such as an overdraft or a credit card. These are revolving facilities with a maximum amount and can use in any way you please.
When applying for credit, the bank has to take all of your current and available credit into account. For example, if you have a personal loan which you have been paying off for two years, with a balance of R15 000 and instalments of R1 000, then these figures are used in assessing your affordability.
If you have credit facilities such as a credit card with a limit of R50 000 and an overdraft with a limit of R25 000, these are also included in the assessment – whether they are fully used or have a zero balance. These facilities remain in place even after your vehicle finance has been approved, and if you do use them then your monthly affordability has to include their repayments.
For this reason, the NCA requires the bank to take all credit facilities into account.
The best advice here is to have as little debt as possible, which frees up money in your monthly budget. Once you’ve paid off an account, rather close it – or lower the total limit for the facility to an amount. The fewer credit facilities you have in your name, the better it looks for your future finance applications.
- Trading in for the best deal in town
If you’ve done all your budgeting and calculating, you’re almost ready to visit a reputable, WesBank-approved dealership. The next thing to look into is whether you can trade in your existing car. If you’ve had your current car for more than four years, chances are that its trade-in value will be more than the money you still owe the bank. This means you’ve passed the breakeven point for your vehicle loan. It also means that the money you make from trading in your car can be used towards your new vehicle purchase – effectively making it a deposit. The same is true if you’ve paid off your
car: the money you receive from that trade-in can be a large deposit for your new car.
If your vehicle’s trade-in value is less than the amount you owe the bank, it means you have not yet reached the trade-in value. In this scenario, you will either have to keep your existing vehicle for another couple of months, or you could even use some of your savings to assist in settling the existing vehicle loan – though that is not ideal.
Of course, having a trade-in where you don’t have to pay in additional money is going to greatly benefit your car loan application.
The last thing to keep in mind is to be patient and shop around for the right deal. The new vehicle market is very competitive and manufacturers always have attractive offers – some that could help you afford a car and others that offer better value. Find a deal that suits your budget and use the advice above to ensure that your next finance application is the best it can be. If you’ve carefully considered your calculations and affordability, you’ll be approved the first time around.