10 Sep The Impact of Credit Scores on Vehicle Finance
When you apply for vehicle finance, your credit score is one of the most important things lenders look at. After all, it tells them whether you have been trustworthy with credit and money in the past. These 3 digits are calculated by accounting for factors like payment history, how much credit you’ve taken out, and whether you defaulted, which can also be viewed up close in your credit report.
The higher your credit score, the more likely you are to be granted better loan terms; longer repayment periods, lower upfront payments, higher chances of approval, and the choice between an array of lenders and finance products.
On the other hand, people with lower credit scores are usually seen as higher risk and granted less favourable loan terms; higher down payments, shorter repayment terms, higher interest rates, and may face limited options (using subprime lenders or leasing a car). Creditworthiness– that’s your credit score and history–often dictates the financial agency you have.
How Vehicle Finance Works in South Africa
Most lenders allow consumers to spread their vehicle purchase costs over 12 to 72 months in our country. There are 2 types of vehicle finance: instalment sales and lease agreements.
Instalment Sales
Instalment sales are the most common means of paying for vehicles. You would make scheduled, regular payments towards the vehicle. Buyers must make a down payment first, which goes toward knocking down the purchase price. What’s left to pay (principal + interest) is usually financed by a bank, credit union, or even the dealership. At the end of this period, the car is yours.
So, what depends on your credit score in this equation? The down payment, interest, loan term, and whether you’re approved for finance in the first place. With an abysmal credit score, expect to be turned down left, right, and centre.
Financial Leases
This is a contractual agreement where you, the lessee, would agree to make periodic payments in exchange for the right to use a vehicle. The catch? You don’t own the vehicle at the end.
You’ll make fixed payments each month and might have a maximum mileage placed on how many kilometres you can drive the vehicle. The lease usually lasts for 2-5 years.
Low credit scores can make monthly lease payments higher since monthly payments are set using estimated residual value– the higher the estimated residual value, the lower the repayments. Lenders assume that people with low credit scores may leave the car in worse condition, making for higher repayments. Plus, lease options may be limited to certain vehicles, mileage boundaries, and terms for people with low credit scores.
As you might have noticed, favourable vehicle finance options are sparse for those with a bad credit history.
How to Get a Better Credit Score
Credit scores are calculated using an algorithm that takes your credit utilisation rate, default history, late payments, credit diversity, and credit history length into account. This algorithm calculates your score based on their amalgamation, then spits out a 3-digit number we lovingly refer to as a credit score.
The secrets to achieving an excellent credit score are not inexecutable. Credit utilisation rate is perhaps one of the most important factors: how much credit you use compared to what you have available–using too much makes you look desperate and unstable, too little: a stinge. Experts recommend that you keep yours below 30% and hovering above 0%.
If you want to seriously scrub your credit so it’s as good as new, consider paying off debts that resulted in derogatory marks like defaults, judgments, or debt review. When they’ve been paid off, you can dispute them with the bureaus, and the bureaus must remove them. This is called credit clearance.
Maintaining a long-standing credit history and a diverse mix of credit is equally important. It shows lenders that you’ve been in the game long enough and know what you’re doing (at least marginally).
Check your credit score without hurting your score using Credit Boost’s free credit checker. It’s a soft credit check, or self-inquiry, so it won’t leave a trace on your credit report or hurt your creditworthiness whatsoever.
If you would like financial advice about accessing vehicle finance or have questions about creditworthiness or scores, get in touch with one of our friendly team members. We would love to help you on your way to achieving your car ownership dreams.