Car finance intelligence

This article was first published in the first-quarter 2013 edition of Personal Finance magazine.

One of the country’s largest vehicle finance houses has introduced an electronic contract that it claims is a world first.

Wesbank, a division of FirstRand, is offering its clients an iContract, a secure web-based system for signing your finance agreement online. It allows you to go through the documents in your own time and “sign” them by agreeing to their content, sparing you the ordeal of ploughing through piles of paper in a stranger’s office.

Chris de Kock, sales and marketing executive head at Wesbank, says the electronic contract gives the vehicle finance house absolute certainty that all the relevant details of the contract have been pointed out to you and that you have acknowledged reading them.

Most vehicle finance arrangements begin on the floor of a car dealership. Typically, after you have chosen the car you want, you are ushered off to see the dealer’s finance and insurance manager, who helps you to structure and apply for finance and insure the vehicle. The manager would collect any documents from you that you need to produce to comply with the Financial Intelligence Centre Act and the National Credit Act (NCA).

You then go home and await a response. Once your loan has been approved, your contract is faxed to the dealer, and you have to return to the finance and insurance manager’s office to sign the papers. It is up to him or her to ensure you understand your rights and obligations in terms of the finance agreement, and you are left to read and absorb them before signing the documents. This process could take up the best part of an hour, De Kock says.

iContract has revolutionised this process, he says, making it more manageable and limiting your interaction with the dealer to the more exciting business of choosing a car and then collecting it.

When it comes to signing the papers, you are sent notification that the electronic documents are ready, and are given your Wesbank account number and a link to a secure Wesbank website. To log in, you need your identity number, the WesBank account number and a personal identification number (PIN), which is sent to you via SMS or email.

The electronic document summarises the key points of the contract and alerts you to details you need to check, such as your personal details, your bank details, the details of the vehicle you are purchasing, and so on. Most of the fields on iContract are editable, so if any of your details are incorrect, you can easily correct them. You can hover your mouse over complicated legal terms to access simpler definitions and you can download either sections of or the complete electronic document as a PDF. You can save and store the document and return to it later if you need to. However, your PIN lasts only a day and then has to be renewed.

De Kock says clients are finding they can be guided through the iContract in 20 minutes.

Personal Finance asked the other banks if they were developing similar electronic contracts for vehicle financing and whether this is how we can expect all loan transactions to be conducted in the near future.

According to Arrie Rautenbach, Absa’s head of retail markets, Absa’s Vehicle and Commercial Asset Finance Unit is developing electronic contracting and expects to launch it this year.

Absa has already launched cellphone-based applications for applying for a small loan. You can arrange a loan of between R8 000 and R150 000 in 10 minutes using this facility, Rautenbach says.

Standard Bank says its Vehicle and Asset Finance Unit is considering various contract and signature options.

Nedbank says its home loan division’s online channel sends final quotations for loans for you to read and accept or decline at the click of a button. The actual loan agreement must be signed at the offices of the attorneys who are attending to the registration of the mortgage bond.

If you are buying a vehicle through a dealer, its finance and insurance manager should be free to apply to all the banks on your behalf, and you should insist that this is done.

However, if you want to know the finance for which you will qualify before you go shopping for a car, or if you are not buying through a dealer, most banks’ vehicle finance divisions have an online loan application process you can use.

During the application process, you will be asked to provide certain details about yourself and your finances. These details may include your identity or passport number, where you work and your salary, your monthly income and expenses, whether or not you own a property, where you bank, and the type of vehicle you wish to purchase.

Once you have submitted the online application, most banks will send you an instant reply informing you of the loan amount for which you qualify. However, the amount will be subject to verification of the details you provided and, possibly, some restrictions – for example, that the vehicle is not more than four years old.

Wesbank says you receive an immediate and fully credit-vetted response to an online application, so you can be sure that the loan has been approved.

Armed with the amount for which you qualify, you can shop confidently in the right price range.

Before you do that, it is worth checking what the monthly repayments would be to service a loan equal to the full amount for which you qualify. To do this, you can use the banks’ online calculators.

WesBank’s website, for example, enables you to calculate your total monthly cost using its “vehicle repayment calculator”, where you input the cash price, deposit, interest rate and any balloon payment, and can choose to include a warranty and an insurance premium. (A balloon payment is an inflated final instalment at the end of the contract.) The website also has an “affordability calculator” that takes your monthly income and expenditure and calculates the disposable income that you have available for a new car.

The banks’ calculators use default interest rates, because they do not know what interest rate the banks will ask you to pay, and the rate you are offered will depend on your circumstances.

Under the NCA, the maximum interest that banks can charge on vehicle finance agreements is the repo rate multiplied by 2.2, plus 10 percent. At the time of going to press, the repo rate was five percent, which meant that the maximum interest rate for vehicle finance was 21 percent.

Some of the factors that influence the interest rate you are offered are your credit record, how much you earn, your monthly expenses, whether you are buying a new or a used car and, if the latter, how old the car is (newer cars are cheaper to finance). The terms of your finance agreement, including the finance amount, the deposit , the loan term, any balloon payment and whether your interest rate is fixed or linked to the repo rate, will also affect your interest rate.

Bear in mind that a finance house with an efficient online application process may not offer the lowest interest rate. To be sure you are getting the best rate, you need to shop around. If a car dealership’s finance and insurance manager offers to do this for you, check that he or she will ask all the banks for quotes and not just the ones with whom the manager finds it easiest to do business.

Also take note of the terms of the contract you are offered. While, for many years, standard instalment sales agreements limited the period over which you had to repay a loan to 60 months (five years), since the promulgation of the NCA, banks have been offering repayment periods as long as 72 months (six years). Although a longer term might make your repayments more affordable, it also hugely increases the interest you pay and thus the total amount you will repay over the full term of the loan.

You should try to avoid an agreement with a balloon payment. Although a good finance house should link a balloon payment to the likely trade-in value of the vehicle at the end of the contract, anything could happen in five or six years, and damage to your car could result in a reduced trade-in value. In that case, you will have to pay in to meet the balloon payment. You could ask to refinance the vehicle, but that will result in your paying yet more interest and fees.

If you are in the market for a second-hand car, TransUnion has an innovation of which you should be aware.

From its Car Value website (www.carvalue.co.za) or CarValue application (currently available only on Android smartphones and those with Blackberry and Windows operating systems), you can check the history of any second-hand car for sale in South Africa; specifically that it is not subject to an existing finance agreement and is not stolen.

The verification report costs R140 and includes a “car value” report, which will give you a good idea of the trade-in and retail values of the car. The values apply only to vehicles that are between one year and 25 years old. You can also purchase just the “car value” report for only R10.