Myths and facts about car financing
Unless you’re familiar with the ins and outs of car finance, it’s hard to tell whether you’re dealing with an old wives’ tale or a fact, when getting advice from friends and family.
There are lots of myths doing the rounds, but Rudolph Mahoney, head of brand and communications at Wesbank, helped to sort the wheat from the chaff.
Myth: Checking your credit score will affect your credit rating
This is definitely not true. In South Africa, the National Credit Act 34 of 2005 states that you’re legally entitled to request a free credit report annually. It’s recommended that you take advantage of this. Request your annual credit report - regardless of whether or not you’re about to make a big purchase, just to keep your finger on the pulse of your credit score.
Myth: Shopping around for the best interest rate will hurt your credit score
This statement is a little tricky. The answer is both yes and no. It’s actually worthwhile to apply for credit prior to shopping for a car. This way you’ll know what budget you have available. You may also want to apply through two credit providers simultaneously to secure the best possible interest rate.
The problem comes in when you apply at too many different credit providers over a prolonged period, for example applying at six or seven credit providers within a month. Trying to haggle for a better rate and repeatedly applying for credit could signal a red flag to credit bureaus. It could indicate you’re hungry for credit. This is counterproductive, as you’ll actually end up with a higher interest rate than you would have received had you only applied at one or two credit providers.
Myth: You have to pay a deposit
This one’s a myth. It’s highly recommended that you put down the biggest deposit you can afford. However, you don’t need to put down a deposit to apply for car finance.
Myth: You shouldn’t choose a balloon payment
Mentioning the phrase balloon payment is often met with the same reaction as saying “Voldemort” at Hogwarts.
But is the stigma attached to balloon payments really justified? According to Mahoney, the answer is no. Opting for a balloon payment can help you buy your dream car if it’s not quite within your budget. This may be especially helpful for someone looking to purchase their first car, where they don’t have an existing vehicle to trade in as a deposit.
But a balloon payment can be like a “clingy ex” if not prepared for properly. Wesbank suggests you avoid nasty shocks when it comes to balloon payments by being well informed on what it means.
Myth: You can’t get car finance with a bad credit record
This is true. The National Credit Act 34 of 2005 prevents financial institutions from giving credit to individuals who are considered to be financially over-indebted. Any registered financial institution that approves a loan to someone who’s overindebted, may be charged with reckless lending and could face millions of rand in fines.
However, you can recover from a bad credit history. So just because your credit record isn’t looking good right now, it doesn’t mean that you can never apply for finance in your lifetime. Again the solution is information, which can be found online through WesBank.
Alternatively, you could consider an alternate method of buying a car - like a rent to own option.
Myth: You can only finance a new car
This is definitely a myth. You can apply for car finance for any vehicle less than ten years old.
Myth: You can fix your interest rate at any time
There are two interest rate options when applying for car finance. The first is a fixed rate which will remain the same for the duration of your loan term. The second is a linked rate which fluctuates with changes to the prime lending rate.
Fixing your interest rate is a good idea if you foresee interest rate hikes in the future and are concerned that these could mess up your budget. The trouble with a fixed rate is that if the prime lending rate decreases, you can’t switch to a linked rate. The terms of your loan need to be decided up front - so choose wisely.
“Every credible dealership has a finance and insurance (F&I) adviser registered with the Financial Advisory and Intermediary Services (Fais) in compliance with the National Credit Act. They’re there to help do a needs assessment and risk mitigation and assist you with structuring your deal. The adviser will tailor the deal to your circumstances - so don’t try to do it by yourself,” says Mohoney. “A car is the second biggest asset, after your house, so utilise this resource to ensure you get the best possible deal on a loan.”