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The Dos and the Don’ts of Applying for a Car Loan

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You’re about to embark on a three- to five-year journey with your beloved car. Before you apply for the car loan at the dealership, are you absolutely confident that you know everything there is to know, ’til loan do you part?

When you say ‘I do’ to your car loan you’ll need to be ready for the commitment. The car will be in your name and the loan will be your responsibility, until the full amount owed to the bank is paid off. Luckily, we are here to help you unpack the boot full of boo-boos that first-time car buyers make, so you don’t get trapped in a cycle of debt.

So what are some of the dos and don’ts that you should be aware of before you apply for your car loan?

Dos:

  • Apply for a car loan that is within your budget and make provision for all the mobility costs (petrol, maintenance, comprehensive insurance and car washes).
  • Make sure you saved enough to put down a big deposit. If you have a big deposit this knocks money off the purchase price, you end up borrowing less from the bank, and pay your car loan off sooner.
  • Maintain a good credit history. Always pay your loans and bills on time. The bank looks into your credit history to make sure you are a good borrower.
  • If you are looking at a used car, consider extending the warranty or service plan to ensure you are covered once the current plan expires.

Don’ts:

  • Don’t be tempted to go above your car-buying budget. Your loan has a higher chance of being rejected because the bank can see that you can’t afford the monthly car instalment.
  • Don’t be embarrassed about going for a cheaper or used car. A small car is the first step to one day owning your dream car.
  • Don’t apply for a car loan just after starting a new job. Rather wait for a couple of months, as this helps to increase your stability status. This counts in your favour when applying for your car loan.
  • Don’t increase the length of your car loan unless money gets tight. The quicker you pay back the loan the less you pay in interest.

Now that you have gone through the common mistakes that most first-time car buyers make, you may need to double-check your budget one last time before you apply for your car loan. Rather be sure than stuck with a car that is burning a hole in your pocket.

Remember to ask the car dealer every possible question before you structure your car loan. This commitment to your car should be the trip of a lifetime, and if you have budgeted correctly you should experience very few bumps in the road.

Shopping for a new car is a process that should start with a pen and paper. This way, you have an opportunity to carefully note every essential expense, and finally calculate exactly how much disposable income you have to spend on a car and all the associated running costs, including petrol and comprehensive insurance. Not only does this help you budget properly, it’s also required to have a full affordability assessment of all these figures when you apply for a car loan.

“Banks require the very same budget that you drew up when you started your car-buying journey,” says Simphiwe Nghona, CEO of the Motor Division at WesBank. “When filling in a car finance application, you show the banks how much you earn and what your expenses are, to arrive at a disposable income figure. This prevents banks from granting you credit that you can’t afford – which helps to keep your credit record intact.”

A personal budget is the first bit of the finance application process, and needs to be accompanied by supporting documentation. This includes supplying three recent payslips and bank statements, proof of residence, driver’s license, and a copy of your identity document or passport. These are used to help banks ensure that you are who you say you are – thus preventing fraud. Without these thorough checks, any criminal who has only a few of your personal details could apply for finance in your name.

Once you have all of your paperwork ready, you can apply for car finance at the dealership. There, you will be assisted by a Finance and Insurance (F&I) representative, who is legally bound to give you solid, unbiased advice according to the Financial Advisory and Intermediary Services (FAIS) act. Dealers will take your finance application and supporting paperwork, then submit it to all the banks. You will receive multiple quotes, one from each bank, for the vehicle you wish to finance. You’ll be able to compare the rate and choose the deal that best suits your budget. If you do not qualify for finance for a certain amount the F&I representative will be able to walk you through the process and assist you in arriving at a more suitable budget.

It’s important to note that any quote you are given is not set in stone. You are still able to structure the deal as you see fit – the WesBank website has calculators that you can use to play around with your budget and see which structure you can best afford. This includes being able to add a larger deposit, and increase or decrease the contract period. In some cases you can also negotiate on the interest rate for the deal – though this remains at the bank’s discretion.

Finally, just as you should provide an accurate breakdown of your affordability with your finance application, you should be absolutely certain about what you choose when deciding on the structure of your deal. After you’ve signed it and taken delivery of your car, you cannot change the terms of the contract.

“Being honest with yourself, as well as the bank, will help you make the right choice,” says Nghona. “Always ask yourself whether you are happy, and able, to make those large monthly repayments for three to five years. You can always back out of an application, so don’t be in a rush to commit to a car you can’t afford.”

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Alan Straton

Chief Cook, Bottle Washer and Broom Mechanic at MyPE
Passionate about Port Elizabeth and definitely NOT packing for Perth. Alan's ethos is epitomised in the words of Nelson Mandela; "I have fought against white domination and I have fought against black domination. I have cherished the idea of a democratic and free society. If need be, it is an ideal for which I am prepared to die." See more articles by Alan.