We spoke to the car finance experts at Wesbank, to see if they had any insider tips to help motorists make informed decision about their car finance.
Unless you’re familiar with the ins and outs of car finance, it’s hard to tell whether you’re dealing with old wives’ tales, or facts, when getting advice from friends and family.
Unfortunately when it comes to car finance, there are loads of myths doing the rounds! We spoke to Rudolph Mahoney, Head of Brand and Communications at Wesbank, to find out which common car finance myths are in fact true, and which we can strike off our list of car buying tips.
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, and 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 one’s a little tricky. The answer is both yes and no. It’s actually worthwhile to apply for credit prior to shopping for your car - because this way you’ll know what budget you have to work with. You may also want to apply through two credit providers simultaneously to secure the best possible interest rate.
The problem creeps in when you apply at too many different credit providers over a prolonged period (e.g. applying at six or seven different credit providers over the course of a month). Trying to haggle for a better rate, and repeatedly applying for credit could signal a red flag to credit bureaus, as 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 negative stigma attached to balloon payments really justified? According to the Rudolf, the answer is no. Opting for a balloon payment can help you buy your dream car if it’s not within your affordable price range. This is especially helpful for someone looking to purchase their first car, where they don’t have an existing vehicle to trade in as a deposit.
A balloon payment can be like a clingy ex if not prepared for properly! Avoid nasty shocks when it comes to balloon payments… watch 2GUYZINACAR explain how in this hilarious Facebook video.
To find out all the pros and cons of a balloon payment, and establish if this method of car finance is for you, read our post, Should I choose a balloon payment?
Myth: You can’t get car finance with a bad credit record
This one’s 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 over-indebted, is at risk of being charged with reckless lending, and could face millions of Rands in fines.
However, you can recover from a bad credit history - so just because your credit record isn’t looking good right now, doesn’t mean that you can never apply for finance in your lifetime. To learn more about your credit score, read our articles, How to improve your credit rating and Can I buy a car once I’ve been blacklisted?
Alternatively, you could consider an alternate method of buying a car - like a rent to own option.
Myth: You can only finance a brand new car
This is definitely a myth. You can apply for car finance for any vehicle which is 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, and 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 throw off 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 upfront - so choose wisely.
“Every credible dealership has a finance and insurance (F & I) advisor 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, risk mitigation and assist you with structuring your deal. Your F & I advisor will tailor your deal to your circumstances - so don’t try to do it by yourself” says Rudolf. Your car is the second biggest asset, after your house, so utilise this resource to ensure you get the best possible deal on you loan.
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