by Alan Shannon
It has been around 15 months since South Africa’s first hard lockdown in response to Covid-19, and the local economy is finally starting to show signs of a gradual recovery. Consumer confidence, which took a severe beating from the pandemic, is slowly increasing, as demonstrated by increases in buyer demand for vehicles and property. This is mainly being driven by the low prime interest rate that makes these big-ticket items more affordable to many South Africans.
But while low interest rates make a compelling case for buying a vehicle or property, it is still very important to keep a level head when considering your options and stick to some tried and tested buying and financing ‘rules’. Here are a few of the most important considerations before signing on the dotted line for your new car or house.
Don’t underestimate the value of expert financial advice
A vehicle or home may be one of the largest assets you will acquire. It is a significant investment and, as with any investment, it is best informed by a clear strategic investment plan in place. This planning process of matching financial goals with financial resources ensures that you buy the right asset, in line with your long-term plans and individual risk appetite. The Professional Banking offering from Nedbank includes access to expert financial advice, so that you can ensure your new purchase remains an asset for years to come.
Don’t get caught out by rising interest rates
Usually, your bank or credit provider will offer you a personalised interest rate in line with your risk profile. Currently, that interest rate is likely to be very appealing, given that government’s response to Covid-19 included lowering the prime interest rate by 300 basis points during 2020. At 3,5%, the repo rate – the rate that treasury lends to banks – is the lowest it has been since 1998, which means that repayments on loans are much lower than they were at the start of last year. While this gives you a chance to get a bigger loan, it is important to think very carefully about whether you will still be able to afford the repayments if they go up when the interest rate rises in the future. Rather plan for this possibility, and instead of applying for the maximum loan you can afford to repay now, get a slightly smaller loan, so that you can still afford the repayments if rates go up.
Manage your credit score
The importance of maintaining a good credit score cannot be over-emphasised. And while it may not be possible to improve your score in the short term, which means you will have to work with what you have in your immediate car- or home-buying process, managing your credit score in the longer term is one of the best ways of getting well-priced finance in the future. Credit providers use credit scores to determine whether an individual is eligible for a vehicle or home loan. A high credit score indicates that you are a low-risk borrower, which means that you may get a more attractive interest rate. On the other hand, a low credit score indicates a borrower with a higher potential for credit default, and banks will raise the interest rate offered to these borrowers to offset the greater risk they take by lending them money. The best way to maintain a good credit score is to ensure that you always repay your existing finance agreements and store accounts on time.
Get the right protection for your assets
Given the high value of a vehicle or property, most finance providers require that the value is covered by sufficient insurance. Even once the asset has been paid off, it is worth continuing this cover, because unforeseen incidents or natural disasters, such as hail or fires, can be devastating if you cannot cover the costs of repair or replacement of your asset.
The importance of tracking and managing your money
Ensuring that you are always in a position to repay the instalments on your home or vehicle finance agreements comfortably requires good money management, including tracking your expenses, however small, every month. It is also good to get into the habit of monitoring your finance agreements so that you always know how much you still owe, how much you are paying back each month, and whether you could afford to make a few extra payments to save you interest in the long term.
Alan Shannon is an Executive: Client Engagement, Professional Banking and Small-business Services at Nedbank
PERSONAL FINANCE