Car loans: How to make sure you can get one

  • Some expert advice for car-buyers
  • Be honest about your monthly expenses
  • Don’t rush into a deal – shop around!

JOHANNESBURG, Gauteng – Prices up, living costs rising while pay just isn’t moving – assuming you have a job, that is – so folk looking for a car loan are cagey about credit.

Especially for a new or replacement car – while simultaneously worrying about what one might cost a year hence.

WesBank, however, tells The Corner that it has five sure-fire tips for people who want to have success when applying for vehicle finance. You can try it at your nearest WesBank office.

BE SMART! CALCULATE! Make sure you add up all your monthly fixed expenses against your nett pay cheque! Image: WesBank
BE SMART! CALCULATE! Make sure you add up all your monthly fixed expenses against your nett pay cheque! Image: WesBank

Here’s what the bankers have to tell you…

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 the applicant can afford the financial commitment.

Credit should never be used for you to live beyond your means but can be a necessity – as is the case with financing a car, the second-biggest loan an individual might take, the biggest, likely, will be a house.

There is no guarantee that a customer will be approved for vehicle finance but there are best practices to follow that could help to improve credit health and greatly increase the chances of being granted credit.

Here are the five suggestions from WesBank – and likely they will apply to any other legitimate finance source you might approach…

1. Establish your affordability
Work out how much you can afford to spend on a car. Calculate your income (after taxes and other pay-slip deductions) and from that subtract all living expenses: food, rent/bond repayment, phone airtime, TV subscriptions, clothing accounts, credit card repayments, electricity/rates/water… don’t pretend some don’t exist!

The result will be your disposable income – the money that can be used for luxuries or essential credit – such as monthly car instalments.

Don’t forget petrol and servicing expenses, replacement tyres, vehicle insurance (that last your finance house will require).
Do all the above yourself, or use the WesBank affordability calculator . 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.

2. These extras aren’t optional
WesBank emphasises the car’s running expenses. Affording a car isn’t just about the monthly instalment. If you have R5000 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 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 R5000 spare for a car about R2500 should be used for an instalment, the rest for fuel, insurance and maintenance.

3. Save up for a deposit
You’ll really impress by having a substantial 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, means lower monthly repayments and improved affordability.

Your ability to afford the monthly repayments is one of the biggest drivers when your finance application is assessed.
Financial responsibility reflects well on your credit profile and goes some way to ensuring your finance application will be approved.

4. 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 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 you can use it in any way you please.

When applying for credit, the bank must 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 R1000, 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 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. Once you’ve paid off an account, close it or reduce the amount available. The fewer credit facilities you have the better it looks for future finance applications.

5. Trading in for the best deal in town
If you’ve done all your budgeting and calculating you’re almost ready to visit a WesBank-approved car dealer. 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 the 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 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.

However, if your vehicle’s trade-in value is less than the amount you still owe on it you have not yet reached the trade-in value. In this case you will either have to keep your existing vehicle for another couple of months or 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.

…and one extra thing… Patience. 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, 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.

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