Before you’ve had a chance to assess your credit score, you decide to get a basic quote on vehicle finance and find out where you stand in terms of credit.
But you quickly find out that this impacts your credit score. We have a look at vehicle finance quotes, what they do to your credit score, and we consider the opportunity cost of vehicle finance.
Vehicle finance and your credit score
“When you request a quote for finance, it depends on a number of things, including your credit score, because it forms part of the lender’s risk pricing. Similarly, with vehicle finance, a credit check is run on your profile based on your ID number,” says Mitchell.
He explains that every time there’s an inquiry made to credit bureaus for a financial product, it impacts your score because it seems as though you’re applying on numerous occasions.
“The bureaus assess whether a consumer is desperate for credit based on the number of inquiries per month. It is perceived as a poor indicator of your financial stability or health to have numerous inquiries on your credit report,” says Mitchell.
He adds that credit inquiries are either soft or hard. A soft inquiry is when you check your own credit score, or one of your current creditors checks your score.
A hard inquiry, on the other hand, is when a business views your credit report in connection with an application for credit, like vehicle finance. The bureau records the inquiry in conjunction with the application, not as two separate things.
“For home loans, pre-approval is a better option as it doesn’t affect your credit score. The same principle may apply to vehicle finance. However, you should ask your provider directly,” says Mitchell.
Are you ready for vehicle finance?
Having experience with credit is a reasonable indication of whether you’re ready to handle vehicle finance, which is a long-term financial commitment. However, that’s not all you ought to consider.
According to Gavin van Dyk, director and certified financial planner at Fiscal Private Client Services, you need to make good, prudent decisions about the use of debt.
“Financing the big-ticket items, such as your home and the car you drive, can make it much easier to save more and to build true wealth,” says Van Dyk.
In an article in TopAuto, he explains that the average price of a new car financed through Wesbank in January 2021 was R358,390.
However, if you take out vehicle finance, you will not pay just this amount, but also interest payments. Assuming vehicle finance is taken out for the above, with a 10% deposit, 9% interest rate, and it’s paid off over 5 years, how much would it actually cost you?
“The important financial concept of opportunity cost comes into play here. Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, it is the benefits you could have received by taking an alternative action,” says Van Dyk.
So, what is the opportunity cost of financing, rather than buying a car for cash? Based on the above example, you will pay R R79,187 on top of the actual cost of the car. This is the opportunity cost of vehicle finance.
“Although we all need a car, we get to choose the car we drive and how we finance the purchase of that car. Over the long run it is prudent to find a balance between the amount of money you spend on financing costs and the amount of money you invest,” says Van Dyk.
Article originally published on JustMoney