Consumers urged to be familiar with the credit rules
Since the introduction of the National Credit Act (NCA) in 2007, consumers have been under the protection of a law that prevents banks and lenders from granting them credit that they cannot afford. Amendments to the NCA came into effect in 2015, and put in place additional requirements for lenders to better establish affordability before approving a credit or finance application.
“The NCA changed the way that consumers are allowed to borrow money, placing the onus on banks to assess affordability and prevent reckless lending. Effectively, the law makes it illegal for a bank to grant a consumer credit they cannot afford,” says Rudolf Mahoney, Head of Brand and Communications at WesBank. “With the amendments the process has become more complex because it did away with the minimum requirements. The new process uses a rigorous assessment to determine affordability on a case-by-case basis.”
Previous affordability rules saw banks stipulating a minimum income for consumers who wished to apply for finance, to determine eligibility for credit. With the affordability assessment that is now in place consumers need only submit their proof of income through bank statements or salary slips. These are used in conjunction with the individual’s credit profile to establish credit worthiness – a process that includes calculating the applicant’s discretionary income after all existing debts have been serviced.
However, consumers applying for credit are urged to familiarise themselves with the new process and affordability assessments. Even though these only apply to banks, knowledge of the process can benefit consumers in terms of speeding up the application and approval process.
Before applying for vehicle finance or credit of any sort consumers should draw up a monthly budget to calculate their discretionary income and loan repayments. Doing this helps them assess whether they are able to comfortably afford the loan for the car they’re considering, or whether they should opt for something more affordable.
When calculating a budget it is also advisable to include enough leeway to accommodate for interest rate hikes and other rising living costs. Although an interest rate hike of 50 basis points may only cause a car instalment to increase by a small amount, other loans will also be affected. Consumers who have financed vehicles, home loans and credit cards will need to accommodate all of these increased repayments in their monthly budgets.
Consumers who have looked at all aspects of their budgets and calculated their affordability also stand a better chance of being approved for their loan. A successful application avoids the need to apply again, for a lower amount. This is especially beneficial when rejected applications, or a high number of applications over a short timespan, will negatively impact an individual’s credit record.
To assist consumers in calculating their monthly budgets and perform a manual affordability assessment, WesBank has an affordability calculator. Once buyers have established their discretionary income they can also use the WesBank loan repayment calculator to determine a vehicle purchase price that suits their monthly budget.
AFFORD ME, AFFORD ME NOT: AFFORDABILITY ASSESSMENTS MADE EASY
When we were young our parents would remind us that money doesn’t grow on trees. There were constant reminders that we need to save money for the things we want most. You were probably also taught not to borrow money unless you absolutely had to. But reliance on credit has become a growing problem for the credit hungry consumer.
For the big things like houses, cars, boats, jet skis and caravans you would more than likely have to apply for a loan, unless you have a bucket load of cash. All existing debt determines your affordability.
It may have been an easy decision to pick the car you wanted, but the difficult choice is figuring out if you can comfortably afford the car you’ve got your heart set on. That’s why it’s helpful to draw up a budget and complete an affordability assessment before applying for a loan. This will let you see how much you can really afford so that you make the correct decision on the dealership floor. Thankfully, WesBank has made this step-by-step process easy for you:
- Step 1: Fill out the minimum expense table. Account for your nett income and the total expenses. Your nett income is your take home pay after tax and deductions. Total expenses includes all of your household expenses: food, medical aid, bond or rent, water and lights, gym subscription, cell phone and general costs.
- Step 2: You will need to submit your identity document or ID card, driving licence, recent utility bill to serve as proof of residence, three month’s banks statements and a recent payslip, or your three most recent payslips dating back three months.
- Step 3: The bank will verify the information on the supplied documents to ensure that the applicant is indeed the person who they claim to be. This is one of many steps to avoid fraud. The bank will also review your expense table to work out how much positive cash flow you have after all your expenses are paid to check that you can afford the car loan you are applying for.
- Step 4: The bank will also do some other credit checks. The credit provider will review how much credit you are still paying off. At the same time, they will evaluate your repayment history to double-check that you are managing to pay your debt on time.
- Step 5: After all these checks are complete, the bank will calculate whether or not you can afford the car along with comprehensive insurance, fuel and maintenance of the vehicle.
- Step 6: The bank will at this point tell you if you are successful or whether your car loan has been declined.
- Step 7: The Finance and Insurance (F&I) expert at your dealership will assist with your needs analysis and recommend an appropriate deal structure for your budget. Should your application be declined, they can also offer advice on the measures that you can follow the next time you apply.
It is important to remember that the affordability assessment was designed by the National Credit Act to give banks a standard to analyse whether car buyers can indeed afford the loan for which they are applying. The rules are there to ensure you don’t become another credit impaired consumer.
All banks are required to tell the credit bureaus about your current loans on a monthly basis. Even if you don’t mention a clothing account or cellphone contract in your affordability assessment, the bank will be able to check your credit profile to see how much debt you are in. So don’t be tempted to ask for more than you can pay back. Rather work at growing your income and lowering your expenses to increase your discretionary income.
Car buyers have to be honest about what they earn and where they spend their money, as it is considered to be fraud if a credit applicant provides false information or documents. A car loan is a long-term commitment and if your financial situation changes it will directly impact your affordability. The bank should be the first to know that you are running into financial difficulty, so that you can address any challenges and make new payment arrangements.
“When you decide to apply for a car loan, your bank goes on the car-buying journey with you and it needs to know everything about your credit history from your budget to your gym contract,” says Rudolf Mahoney, Head of Brand and Communications at WesBank. “When filling in your affordability assessment and car finance application, you show the bank how much you earn and what your expenses are. The affordability assessment is a process that helps you determine what you can afford on your current budget, thus preventing you from getting into debt that could be detrimental to your future.”
To help consumers calculate their monthly budgets and perform a manual affordability assessment, WesBank has an affordability calculator. Once car buyers have worked out their discretionary income they can also use the WesBank loan repayment calculator to budget for the running costs and monthly car instalments.
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WesBank is acknowledged as the leader in Vehicle and Asset Finance with over 40 years’ experience and R162 billion in assets currently under management. WesBank focuses on providing secured finance to both the retail and corporate markets, as well as related services such as insurance, fleet management and full maintenance leases. WesBank is the partner of choice for over 80 leading international brands in fields such as original equipment manufacturers (OEMs), insurance providers and oil companies. WesBank is a global company with successful operations throughout Africa as well as the UK.