How banks decide what they’ll give you for a car loan

When applying for car finance at a bank or finance provider, you’ll be judged on two main criteria to determine whether you’ll be able to afford your monthly dues.

These are your affordability and creditworthiness, according to WesBank.

What is affordability?

In terms of formal credit, affordability is a measure of how much a person can reasonably afford per month for a new credit payment.

Affordability is closely linked to an individual’s discretionary income, which is the amount of money they have left over at the end of the month after deductions like taxes and other necessary expenses including water, electricity, rent, and groceries.

“The higher the monthly repayment for a given vehicle, the higher your discretionary income (and therefore, your affordability) needs to be,” said WesBank.

Affordability isn’t as simple as deducting expenses from your salary, however.

Each finance provider calculates an applicant’s affordability based on their own scoring system to avoid subjecting either party to unnecessary levels of risk. As such, it’s rare for a lending institution to allow a person to use all their discretionary income on a single repayment.

“So while a new vehicle finance applicant with discretionary income of R5,000 may feel that they can personally take on a car repayment of R5,000 p/m, the finance provider is unlikely to approve such an application because it leaves the customer in a precarious position,” said WesBank.

What is creditworthiness?

While a person may have the funds available to afford a given vehicle, they may not always be willing to pay for it. That is where the second parameter, creditworthiness, comes into play.

“Your creditworthiness is how likely you are to pay the money you owe on time, based on your credit history,” said WesBank.

“If your credit history shows that you can’t be relied upon to pay back what you owe, then your chances of being approved for new credit are low, no matter how high your affordability is.”

Therefore, it’s not only important to have a lot of cash in the bank, but also to make sure you pay your loans on time and in full each month to build and maintain a good credit score that will help with future purchases.