A bad credit score
Before we assess whether new or used is the right option for those with a bad credit score, let's define what a bad credit score is and what factors go into determining a bad credit record. A credit score is a rating based on how good, or indeed, how bad a person is at paying off their debts. In order to get any sort of loan in South Africa, your credit score will be looked at, and if the score is poor, you may not qualify or be subject to stringent regulations and higher interest rates.
Things that negatively affect credit scores include the sort of credit you have had in the last 6 months, your history of payments or lack thereof, how much credit you have used, which has a 50% threshold, any legal proceedings pertaining to the collection of debts, current accounts and of course, any defaults.
Do some work beforehand
If you know that you will be looking to purchase a new vehicle in the near future, there are a few things that you can do to helps yourself:
- Make sure the prime lending rate is not too high or due for an increase.
- Save and put a bigger deposit down on the vehicle as this lower the risk for the finance house and will lead to a better rate.
- Try to get pre-approved before you pull the trigger.
- Ensure that you pay all other outstanding credit items in the months leading up to the purchase.
- Check your credit record beforehand and ask for advice on how to improve it.
Should you go new or used?
Those of us with a bad credit record still require credit, particularly when looking to finance a vehicle with a financial institution. When looking at whether to buy a new or a used vehicle, it would depend entirely on the cost of each. For example, if you had a budget of R300 000 and wanted either a new or a used vehicle, the financial institution may be more willing to finance the newer car at a lower rate as the risk is lower for them.
The reason the risk is lower is because a new car will have a full warranty and potentially a service/maintenance plan, therefore offering a lower risk of the owner incurring additional repair or service fees and potentially then defaulting on their monthly payments as a result. A used car has a greater risk as the exact history is difficult to gauge and it, therefore, offers a greater risk. That being said, a used car is not subject to as much depreciation as a new vehicle, which is one of the risk associated with a new vehicle and something taken into account by a finance house.
Also, consider that while the value of a new vehicle is known by the finance house, a pre-owned vehicle's exact value is difficult to determine exactly as the condition of each pre-owned car differs wildly. We, therefore, recommend going for a new vehicle if you have a poor credit score.
