The Credit Score You Need to Buy a Car

What is a Good Credit Score to Buy a Car in South Africa?

In South Africa’s thriving automotive environment, motorists are faced with a great deal of decisions when it comes to buying a car. The good news is that the car market seems to have stabilised, despite international tensions and economic uncertainty. Plus, car owners are starting to feel a little more confident as more “affordable” entry-level options roll in. 

While the new-car market grows, the second-hand market goes head-to-head with competing import brands thanks to their reasonable prices. International automakers saw an opportunity to target buyers who need the funds to buy the car, or at least, finance the car without covering intense interest rates. That’s just one theory.

Keep in mind, this doesn’t necessarily mean it’s a negative thing to take out a loan on a car, whether you’re paying off an R100,000 vehicle or R1,000,000 vehicle. It’s just a good idea to do your homework so that you can make smart and well-informed choices when you’re bringing your bank or a third-party into the purchase.

With that in mind, we’ll break down some of the important points that you should remember about car finance payment terms, what it means to have a good credit score, how to keep a healthy credit score, and what you can do to ensure a successful purchase, now and in the near future. 

What is Car Finance and How Does it Work?

What is car finance and how does payment work? 

Car finance is taking out a loan with a dealership, bank, or financial house in order to buy a car right then and there. It helps car owners take the vehicle sooner rather than paying the bigger amount on the spot.  

Vehicle Finance Payment 

Paying back your car loans really depends on what you want out of the car. Are you planning to own it? Are you someone who changes vehicles often? 

When taking out a loan, you need to consider the following: 

Interest Rates 

In layman’s terms, interest rates can be frustrating because they add up over time. Essentially, you spend more on your vehicle because you’re paying a percentage (each month) to the bank for loaning you the money,  

For example, you’re able to make payments on a monthly basis for up to 72 months (or depending on your bank’s terms). At the end of that term, you’ll have paid more for your vehicle. Plus, there are two types of interest you need to remember when choosing this route: linked rate and fixed rate. 

Be sure to ask detailed questions and read the fine print before you go ahead with the contract. 

Loan Term

Your loan term comes down to the vehicle finance contract. The contract outlines the interest and fees as well as your predetermined period of repayment, typically between 12 months, 72 months, or more. 

Some car buyers opt to pay smaller amounts for longer periods of time and this is not always sustainable, depending on lifestyle factors and budget. Some banks recommend to pay as much as you can and choose shorter repayment periods (if possible). You want to match your trade-in value with your settlement value as close as possible. 

Balloon Payments

When you make a balloon payment, you’re essentially repaying the final instalment in lump sums. This type of payment type is designed to lower monthly costs, but the interest paid is higher over the contract period. 

Along with these payment options, you also need a credit score. Ideally, a good credit score. 

What is a Good Credit Score in South Africa?

To know what quantifies as a good credit score, you must look at how scores are calculated. Your score – amongst other factors that qualify you for a car loan – depends on several factors:

• Payment history
• Current debt
• Length of credit history and repayment behaviour
• Types of credit accounts
• Recent credit applications (biggest factor)
• Employment and income stability

While these can determine your credibility, some dealers will have a minimum credit score requirement. On top of that, the minimum score can change from one dealership to the next, and the model and make of the vehicle you’ve chosen.

Excellent scores above 658 while good credit scores range from 634 to 657. This typically puts you as a low risk candidate. Anything below 616 is considered poor and risky. 

What Credit Score is Needed to Buy a Car? 

Mandy Blewitt, Nedbank Senior Marketing Manager for Retail and Business Banking says, “A score of 621 is what you need to unlock personalised credit offers and interest rates. 621 is considered a good number, and if you achieve this or higher, you are doing very well in terms of your credit profile.” 

While you can achieve a healthy and noble credit score, you might not always have to overthink it. Clearscore has taken a different approach in response. 

They say that there isn’t a credit score out there that guarantees finance approval. But, lenders do prefer applicants who have credit scores above 600 and higher. 

Car Finance for Low Credit Score 

Low credit scores are still considered, but there are several factors taken into account, such as your credit behaviour and budget. It definitely plays a role in the likelihood of approval and interest –  the higher the score, the better the interest. 

There are options out there for people who are stuck with bad credit. You could look at the following:

1. Leasing a vehicle
2. Renting-to-own
3. Traditional vehicle finance
4. Personal loan

There are obvious pros and cons to each, but that’s something you can talk about with your lender. 

Buying a New Car or Pre-Owned Car on Finance

When buying a new car, it’s easy to get sidetracked and excited about the purchase. However, it’s better to have everything prepared before you even step into the dealership. 

When you look at the basics, it’s always budget. Every purchase you make in your life comes down to budget. With a budget, you’ve already narrowed down your search on finding something special, it only makes the rest of the process easier for you and the lender (if you’re choosing to finance). 

So, should you buy brand new or pre-owned? That’s a matter of preference and budget. You should always opt for a vehicle that is well within your means and one that factors in your lifestyle. You should also consider the total cost of car ownership with your purchase – you’re not just buying the wheels, you’re paying for Car Insurance, Maintenance Plans and vehicle Service Plans, fuel, etc. 

To find the best deals on vehicles, read our article: How to buy a car for the best price in 8 easy ways. You never know what you might find.

The Bottom Line

So, you’ve now seen what it takes to finance a car and the kind of credit score you should strive for. Every little bit counts, if you can make those payments in time, that’s already a positive for you. You don’t have to be in the top earners bracket to get the car you need, you just have to be realistic.