Is a bank client just a number?

A Moneyweb reader posed an interesting question about banks’ financing decisions when he thought he acted responsibly by opting for a cheaper used car instead of forking out nearly twice the amount for a new vehicle.

He felt that the bank was penalising him with a higher interest rate for applying for a much smaller loan than he qualified for.

“Bankers, help me out here. I applied for vehicle finance for a 2015 car via Toyota. The funding was approved within minutes of the application by all the banks.

“The best rate I can get is prime. I query this because I can easily afford the vehicle. The feedback: Its a 2015 model – they won’t go lower than prime.

“They will definitely consider prime minus if I buy a 2020 model or younger.

“I am asking why they are pricing the debt on the car and not on my risk profile,” the reader asks, saying that the banks would happily extend finance for more than double the amount he applied for.

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“It seems that the business model is to reward the wrong kind of behaviour. And then they will be warning people about borrowing within their means, and punish them for taking that advice. Bizarre, or is there logic that I am not understanding?”

ALSO READ: Worried about your rights when buying a used car? Here’s what you need to know

Older cars

Banks do not shy away from financing older cars and long gone are the days that it was impossible to get financing for a car older than five years. Banks even offer financing repayable over a term of eight years.

A longer term loan means lower instalments for the new car owner, and more interest income for the bank.

Modern cars are better made and last longer than most of the models produced in the 1960s.

In this particular case, our reader was looking at a 2015 Toyota Land Cruiser, a vehicle that would probably outlast the buyer (and his children).

It was on offer for R750 000, compared to a new one at around R1.5 million. However, the buyer telling the story did not say if the vehicle had any accessories as these cars often have, and which can run to another R100 000 and more.

The potential buyer applied for financing of R500 000. Apart from qualifying for even more financing at a lower rate, putting down a deposit of a third of the value of the vehicle seems to be a safe bet for the bank.

ALSO READ: Used car dealer instructed to refund consumer, court confirms Tribunal’s finding

Catch-22

“The interest rate seemed to be tied to the age of the vehicle,” the reader complained.

“If I bought a newer model (2021 for example) I could have got prime minus. I qualify for finance for a 2021, but I don’t want to spend that kind of money on a car.

“It seems that [the] credit history of the borrower does not matter. I was looking to buy a car significantly below what I qualify to buy. That didn’t seem to matter.”

Thus, the fact that the car was nine years old must have cost the applicant a few points in the score that would mean a better rate.

The truth is that banks’ data show that older cars are higher risk because a costly breakdown can render an old car totally worthless. Some borrowers might stop paying for a worthless car.

ALSO READ: This is how much it really costs to keep your car on the road

Basics

Lebogang Gaoaketse, head of marketing and communication at WesBank, provided some background to the process of considering vehicle financing applications.

“A customer’s credit record and credit score are the first variables banks look at when reviewing a vehicle finance application. These have a bearing on whether the application will be approved, and the interest rate that will be offered on the deal.

“This makes it vital to maintain a good credit record, even in tough economic times,” he says.

In addition, banks will check credit bureau records. Independent credit bureaus maintain detailed records of consumers’ credit history and assign a credit score based on the person’s credit profile. This information is available to lenders who use it to determine a client’s risk profile.

A bank will further check the asset risk, with Gaoaketse saying that it includes variables such as the price of the vehicle in relation to the applicant’s disposable income.

“WesBank does finance older vehicles, vehicles up to 20 years old. The interest rate is based on the loan. The riskier the loan, the higher the interest rate.

ALSO READ: WesBank customer’s 20-year quest for justice is now before the ConCourt

“It’s all about security for the bank,” he says, implying that an older car might be considered a bigger risk.

“Other factors that are considered include the contract term or finance period, whether a deposit is being paid, if a balloon finance option is chosen, and any other factors relating to the structure of the deal,” he says.

The average vehicle financing for WesBank clients is R350 000. This is in line with the national average in SA, according to bank data collated by TransUnion.

Gaoaketse says a loan application is not merely considered in terms of the instalment relative to salary, although a good rule of thumb is that the instalment on a car loan should not exceed 20% to 30% of one’s net monthly income.

He notes that demographics such as race and gender have no bearing on interest rate calculations or the outcome of an application.

ALSO READ: 1.9 million people qualify for car financing but do not use it

Happy ending

The initial complaint had a happy ending. The prospective buyer bought another car and the bank got its (high) interest rate.

“I bought another vehicle elsewhere. It was an incredible buy so I accepted the prime plus financing.

“I will use part of the trade in to settle other debt and will be building up equity in the home loan for my next vehicle purchase,” he says, aiming to use his cheaper mortgage bond for financing.

This article was republished from Moneyweb. Read the original here.