In this feature, we explain why a bad credit record will cost you a lot of money in repayments – if it isn’t doing so already.
Everyone wants to get a great deal on a car – new, demo or used. You can browse through thousands of vehicles that are listed for sale on Cars.co.za.
Then, once you’ve made your shortlist, you can contact one or more of several dealers and haggle for hours over the price of the vehicle that you want. Maybe you’ll save a few thousand rands. Bon chance.
But there is a very important component of car-buying that is almost always forgotten … and it can cost you thousands every month on your vehicle finance: A bad credit score.
Let’s take 2 people, who we’ll name “Credit-wise Wandile” and “Carefree Cindy”. Both have their hearts set on a 2020 Volkswagen Polo 1.0 TSI that they found on Cars.co.za for R250k. They have shopped around for the car, the finance deal and the insurance. The amount they spend each month means everything to them. After all, who wants to spend a cent more than they have to?
Wandile is offered a premium of R3 421 per month by his bank for finance repayments and R492 per month for comprehensive insurance.
Cindy is offered R5 019 pm for finance repayments and R1 215 p/m for insurance.
Use our finance calculator to work out your vehicle repayments.
Remember that they are buying a similar car, but Cindy is paying R1 598 pm extra for financing, plus R723 pm for comprehensive insurance cover. That is in excess of R2 300 more than Wandile – for virtually the same car. Over the 72-month term of the loan agreement with the bank, that represents a saving of R167k on finance and insurance. That’s a lot of money – nearly half the value of the car.
Why? Credit-wise Wandile knows his credit score and is pretty good at managing it. Carefree Cindy has no clue what her credit score is and while it was good enough to get approval from a bank for an asset-finance loan, the premium they offered her was comparatively horrible.
What exactly is a credit score?
Think about it, when you apply for credit for a car, you are asking a bank to lend you hundreds of thousands of Rands over many years. That means you are promising to pay the bank a significant sum of money every month for, on average, 6 years. What the bank wants to know is whether it can trust you to pay them back. Your credit score is calculated by a Credit Bureau and is basically a measure that the banks can use to work out whether they “can trust you”.
Read first: What is a credit score and why is it important for vehicle finance?
How does it impact my vehicle finance?
A good credit score means the banks feel they can trust you to repay the loan/pay your instalments regularly. Because of this, 2 things will happen:
1. When you apply for vehicle finance, the banks will be keen to gain you as a customer – after all, you are the kind of person who has a reputation for always paying back loans. This means they will offer you the best terms possible to get the deal.
2. All the banks will offer you a deal, which creates great competition. This means that your dealer will be able to negotiate with all the banks to get you the best deal.
So why is there such a big difference in the amount they pay each month?
There are major reasons why there is a big difference:
Better interest rates for vehicle finance
Credit-wise Wandile’s good credit score meant he got a great interest rate offer of prime. Only the customers with the best credit scores get prime on vehicle finance. Unfortunately, Carefree Cindy’s poor credit score meant she only got offered prime +6%.
Bad credit score? All options to finance your car
Better residuals
Banks will often allow a residual of up to 30% of the value of the vehicle for a good credit score. Residuals offered for low credit score will be less than 10% – often zero. Residuals can make a big difference to your monthly payments. Credit-wise Wandile not only got offered prime for his good credit score, he was offered a 30% residual as well. Cindy did not get offered any residual, which increased her monthly payments.
Your insurance is cheaper
If you finance your car, the bank will insist that you have comprehensive insurance. Almost all insurers will get your credit score before they generate a quote and guess what? People with bad credit scores pay more for their insurance – often several hundred Rand more – every month.
You can get insurance quotes right here on Cars.co.za
No deposit on your car
When banks see poor credit scores, they will often not finance the full value of the car. For example, if you want to buy a R250k vehicle, they may not finance the full value of the car. They might only approve finance of 80-90% of the vehicle, which means you might have to find R50k (in the case of a R250k purchase price) to put down as a deposit in order to get the car.
You can add extras
If you are buying a used car, it is often useful to buy an extended warranty or maintenance plan with the car. These are not cheap – they can cost up to R20k (it depends on the make, model and age of the vehicle), but they can give you a lot of peace of mind. Also, you may not have R20k cash in your pocket to pay for this product.
If you have a good credit score, the Finance Manager in the dealership can arrange that this product is added into the finance deal and paid off along with the car, which means that you won’t have to pay R20k in cash, but pay it off monthly. If you have a poor credit score, however, this option will not be offered.
I hope I have convinced you that a good credit score can save you a lot of Rands per month. Your credit score is like your waistline – if you let go and just eat and drink everything, then there will be consequences. You need to watch what you eat and exercise regularly to get or maintain a trim waistline.
With your credit score, you need to know what it is and manage it regularly. Your credit score may not be as visible as your waistline to your friends – but when it comes to your bank balance, your bank account will love you more if you manage your credit score.
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What is a credit score and why is it important for vehicle finance?
