Car financiers have urged young South Africans to plan, budget and build their credit profiles before committing to buy their first cars.
This comes after the car enthusiast and podcaster Muzi Sambo posted a purchase agreement between a 31-year-old woman and her credit provider, Wesbank, for the R300,000 purchase of a brand new Suzuki Baleno.
The deal - which resembled a poisoned chalice - showed that the woman would finance the car at about R5950.16 (R5881.16 plus a monthly fee of R69) per month for 96 months (eight years).
She was offered an interest rate of 16.6% over a period of 96 months (eight years), paid a deposit of R7000 for the vehicle which was valued at R299,900.00. Her total repayment was expected to be R571,215.36 after eight years.
First-time car buyer needs some help.
Gender: Female
Age: 31
Car: Suzuki Baleno GLX
Credit provider: Wesbank
Let's identify the red flags and save our sister🙏![CDATA[]]>🏽 pic.twitter.com/1rhTMVWLWL
Sambo, who is also a dentist by profession, is a car enthusiast who is passionate about educating fellow young South Africans about car financing.
The podcaster asked people for help in identifying the red flags in the quote that the woman got from Wesbank.
IOL Business has reached out to experts to shed some light on the dos and don’ts of car buying.
A car, for most people, will be one of the most expensive purchase most people make in their lives, so it is important to do it right.
Thabo Matsaung, financial education programmes manager at Old Mutual and Ernest North, co-founder of Naked Insurance, have shared tips to help this woman and other first-time buyers avoid signing up for bad apples.
Plan. Plan. Plan.
“The woman should have planned for the car,” says Matsaung, after scanning the deal offered for the 31-year-old woman.
Matsaung said the young woman should have created space in her budget to include her plans to buy a car. This should accommodate the ability to pay for the car, the insurance, and running costs, including petrol and maintenance.
The woman should also check her affordability by checking her income against expenses including the anticipated car expenses.
If she is going to apply for a loan or car financing, she can check her credit score by downloading a free credit report. She can do this through established credit bureaus and through financial services providers.
Based on the affordability and her credit score, she must shop around for the best deal including repayment terms, interest rates and other extra charges etc.
She must be careful not to be pressured into buying a car through statements such as sales on valid for a week, or limited stock available because these are tricks that are used by marketers to sell their products.
She also needed to read the terms and conditions and shop around if she was not satisfied with the terms and conditions.
Interest rates
North said the interest rate charged by a bank or financier will usually depend on the risk profile of the individual.
If an individual is considered low-risk they will typically receive a lower interest rate, while the opposite holds true for higher-risk individuals.
Low-risk people are those with good credit history, who pay their accounts on time and who have more disposable income.
In the case of the woman, several factors might have contributed to the high interest rate she was quoted:
– Her credit history and credit score. First-time buyers like the woman might have little to no credit history, or a poor record, which is riskier for lenders.
– North said that car loans taken over long periods can result in higher interest rates. In the case of the woman, the agreement spans an 8 year (96-month) loan term, which is considerably longer than the average of 5 or 6 years.
– A larger deposit implies less risk for the bank or financier, while a smaller deposit may be associated with a higher perceived risk, according to North. With a deposit of 5% to 10% of the car’s value, the woman may have received a more favourable quote.
North said It's important to conduct thorough research, shop around, and compare offers to ensure you secure the best deal.
Factors that prevent first-time buyers like the woman from getting financing
Access to finance depends on the ability to pay and the willingness to pay, the ability to pay is determined by a person’s affordability.
A person’s affordability can be measured using a person’s income and expenditure e.g. a statement of income such as a payslip and expenses that are on their bank statement and are listed in the various credit bureaus.
“The willingness to pay is measured by propensity to pay. This is determined through a credit score. Either a bad credit score or little or no affordability can prevent a person from accessing loans,” Matsaung said.
IOL Business