Banks are bound by the National Credit Act (NCA) to ensure that consumers can afford the financial commitments into which they enter. While there’s no guarantee that a customer will be approved for vehicle finance, there are best practices to follow which will help improve the chances of being granted credit:
1. Establish your affordability
Find out how much you can afford to spend on a car. Take your income (after taxes and deductions) and subtract all living expenses like food, rent, airtime, TV subscriptions and more - all of these costs must be deducted to arrive at your disposable income. This is the money that can be used for luxuries - or essential credit, such as monthly car instalments.
2. These extras aren’t optional
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 or maintenance plan you should also consider saving money each month to cover regular maintenance costs.
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 for buying a car, about R2500 should be used for an instalment, with the other half going towards fuel, insurance and maintenance.
3. 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. It reduces the amount of credit required for the transaction which means lower monthly repayments. Your ability to afford the monthly repayments is one of the biggest drivers when banks assess your finance application.
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.
When applying for credit, the bank has to take all of your current and available credit into account. 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.
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.
5. Trading in for the best deal in town
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, 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.
Having a trade-in where you don’t have to pay in additional money is going to greatly benefit your car loan application.