VEHICLE FINANCING & YOUR CREDIT SCORE

[00:00] Welcome to the official podcast from mycreditstatus.co.za. We will be introducing you to credit experts who will be providing valuable insight and advice from your financial health to improving your credit status and score. Your host for the show is Laura Palmieri.

Laura: [00:20] Hello, and welcome to My Credit Status podcast. On our show today we welcome George Simitopoulos, the MD of Carfin. Just a quick background on Carfin. They are South Africa's number one independent vehicle finance provider. They offer also car finance and vehicle solutions along with vehicle refinancing. Hi, George. Welcome.

George: [00:41] Hi, thank you for having me.

Laura: [00:43] No, thanks for joining our show. Okay, let's kick off on the first question. George, can you briefly explain the different types of vehicle financing your company offers?

George: [00:54] Well, there are two kinds of financing. One is the normal higher purchase agreement where you're buying a car for example, for a hundred thousand rand and it gets financed over a period of time, sixty months, seventy two months, forty eight months, whatever you elect and then once you've paid up those sixty months the vehicle belongs to you. The residual payment option is the secondary one. That's where a certain amount of the vehicle gets put aside, interest runs but when paying that off you're not off that capital. So let me give you an easy example.

Laura: [01:33] Yes, I think that will help.

George: [01:33] That same car for a hundred thousand rand you will have say 20% residual, that means you will be paying off the capital of eighty thousand rand and not a hundred thousand. That is to bring down your monthly installment, but at the end of the term you still owe the bank that 20%. So if it's a kind of driving a car and wanting to pay less for the month, that is the option to go with, but it's not the one that we would advise.

Laura: [02:08] George, that's quite a common option nowadays.

George: [02:12] It is a common option because as human beings we always like to over-excel or drive something that's above our means, so you actually bluffing yourself by driving a more expensive car and not really being able to afford it. So it's 20% that they will withhold of the capital effectively at the end. You would have to either refinance or pay in cash.

Laura: [02:40] That residual value.

George: [02:42] A residual value. In our fourteen years of existence we have maybe out of thousands of deals that we've done, done five residual deals.

Laura: [02:56] Oh really.

George: [02:56] That is on the insistence of the client, so basically if the client said if you're not going to do this, we're not going to do the deal with you. And we were always against us because we then see the backlash of this, of banks having financial residual deals and people coming to us and saying, "I received this letter that I owe the bank sixty thousand rand or seventy thousand rand and I have to pay them on that due date." Those are people with residual banks.

Laura: [03:27] I see.

George: [03:29] And then in most cases we actually refinance that residual value for them, so they end up paying a longer period for that car so it's not an advisable financial option. The normal one is to pay the monthly HP, the capital and interest over a term.

Laura: [03:49] Okay. That makes sense. Okay, now to apply for finance what are the essential criteria's that you look for before proving an application from your side?

George: [03:59] So we are not a leader ourselves because for that we need a banking license, so we are the intermediary that helps and place finance with you and with the commercial banks. So our criteria is very similar to what their criteria is. There are some exceptions made to us in terms of they call it risk buckets, the amount of risk the banks are allowed to take. For certain dealerships that are very conservative and these a limited risk bucket that they will do. With us we have the biggest scope of risk bucket almost as if we are a fleet and that's just because of our collecting buying power. So a person that traditionally might not be approved at the normal small dealership on the corner might get approved through us because of that extension. So let's get back to your question, clear credit record, no judgments, no adverse payments, no late payments, no history of not having paid a car in the past and they've repossessed it.

Laura: [05:13] Okay, so are you specifically looking for that then with regards to the car, repossessing cars or does it apply for example, the latest you can apply to any form of credit that's on their report?

George: [05:26] Yes, well I mean if you take a percentage of people that have defaulted on minor loans or they forgot to pay the excess payment on their dentists bill, those are being excluded by the credit bureaus and the banks have also weighted that factor in saying because a guy didn't pay his thousand rand account doesn't mean he's necessarily a poor payer. Okay, so traditionally in the past that would count against you, but now it doesn't so much.

[06:01] It'd be interesting to see how the banks scoring models will change after COVID because this has affected every person in the world, so it's not a certain sector. You know, it's not like a mining sector where they’re closing the sector down and a lot of miners are losing their jobs. We are no matter if you are blue collar, mid range or a wealthy person, we are all suffering the same kind of consequences. Expenses are relative and so people are defaulting on high end, middle end, and lower end, and so it will be interesting to see how the banks are approaching the new scoring model which they will have to alter.

Laura: [06:45] And you haven't yet encountered that? You haven't yet noticed anything with regards to this change that might be coming?

George: [06:52] Well, we've seen one of the largest banks we've mentioned. I won't mention their names, but they as default have doubled up on what prime is as a general approval rate. So they were coming in like 15% even if you are a prime plus one kind of candidate, they are coming in as a defaulted price, so that would have to be in negotiation with that specific bank on that specific client. But it's almost like the guys aren't scared and I can understand that because they haven't seen the backlash of what's happened.

Laura: [07:31] Yes, so it's a new terrain that everyone is actually entering in on every level.

George: [07:38] Terrain there's no data, you can't foresee what's going to happen and the funny thing is we are in a very false illusion, really because most of us have taken up payment holidays on our payments. Car payments and house payments and a lot of those now in July will be the last payment holidays the three month ends. So reality is going to hit in the next month and I think that is when the banks will be able to determine where the people have lost jobs or may have to take salary cuts, commission earners not earning commission. And that uncertainty, you can understand, will have to determine, that data will have to determine as to how they will score the future.

[08:29] So I think the banks are in for a rough ride and people are very unsympathetic sometimes to banks. We'd say you know what they're making money and they do this and they do that. A bank is entrusting to loan you two hundred thousand rand on the car that if they at any time had to say to you, give us that two hundred grand, you wouldn't be able to. That's a risk that the bank takes and in this specific scenario that they're in they're certainly not going to make money. The banks are going to lose a lot of money, millions and millions and millions of rands and hopefully not too much because it's going to alter how they're going to be pricing in the future.

Laura: [09:11] No, true.

George: [09:11] And even us that will have finance or people that will apply in the future might get priced in for those losses so it's a very uncertain time, but the necessity of vehicle finance is there. You need a car to take the kids to school. You need a car to go to work you know.

Laura: [09:36] Especially in South Africa without our very poor transport systems.

George: [09:40] Very poor transport systems. We often get people that are so desperate that unfortunately have bad credit and they get car allowances and we can't really assist them and they need to buy that car to be able to go to work and do their jobs because they commission earners or whatever the case may be. So it's important then to look after your credit score, it's very important now, even more than before.

Laura: [10:08] More than before. Alright our next question actually is how does Carfin score people? So can you explain, so a person comes in and applies for finance on a vehicle that they’re interested in financing. From your side once they've completed the application, do you do the scoring or you send it off to the finance institution?

George: [10:30] Okay, so we don't have any insight as per certain banking and finance institution scorecards. Certain banks have appetite for certain markets, right?

Laura: [10:38] That's correct.

George: [10:38] What we can do, we can do a pre-sifting, which when you apply with us we send it into a credit bureau and we actually do the pre-sifting to see if someone is eligible to apply for finance. So it's almost like the first hurdle you got to jump over, so it's a first screening and then once that's in, then it gets sent to the banks.

Laura: [11:02] But yet there's no guarantee with that first screening, am I correct?

George: [11:05] Also not because you might have a clear credit record, but because of a desperate situation that you're in might say that you earn thirty grand, but once the banks go and validate it they only see that you earning fifteen grand because that's what's going into your bank account. So then it fails that validation that's where the failure comes in. That's out of our heads, that goes through the bank's criteria. We similarly had an issue this morning with someone that had done that. He had quoted a salary that he was earning pre COVID when things were doing well and he still kind of submitted that as a salary, but he's a commission earner, so that salary is less than half now.

[11:56] Now you can imagine a bank, two things, they don't normally trust someone if they've given false information, number one and number two it comes down to the affordability. What does this man really earn? Does he earn thirteen/thirty grand or does he earn fifteen grand? And that normally then will be a decline, so my advice to people is be sincere and speak the truth. The systems lately, banking systems, credit bureau systems, payroll systems are so up to standard that you can't lie anymore. The world that we living in you can't hide, we can't lie, so my advice to people is to be honest and buy something within your means.

Laura: [12:44] No, it makes sense actually, which actually our next question is, so what if a consumer's credit history is poor, what advice do you give them? So obviously this is the first hurdle that you go through like you mentioned now, and they don't score, their score is low. What advice do you give them then?

George: [13:01] Well, first of all so like I said before we are now in testing times and your credit history or your credit scoring moving forward will be very important because the criteria's initially I think in the beginning post COVID will be quite strict so that the banks could filter out people that are good payers. So to come back to the question, what advice is there? Always engage with your lender if you are running into troubled times. Engage with them, speak to them and when you make an arrangement, make sure you stick to that arrangement.

Laura: [13:51] Honour the arrangements.

George: [13:51] So we are all speaking to banks. We're all making arrangements, stick to them. Keep the line open because if you don't they will then give a negative report into the credit bureau and then you get this mark against your name and to recover from that depending on the severity of the mark, I've seen people take five years before they can then buy a car again.

Laura: [14:18] Yes, correct that is right. It takes an average of five years to clear it up.

George: [14:21] So I'd say always play open cards with them and document conversations. Your credit score is most probably the second thing after your health status. If you're not looking after your health, credit is the next thing you should be looking after because without credit you can't buy a house, you can't buy a car. People think credit is only for maybe having a clothing account. It's certainly not.

Laura: [14:55] I think the average person doesn't realise the effect that it has long term. They see it as a short term solution, so they want to finance a car. Okay, so the finance gets approved and then they might default and get listed etcetera, they don't realise repercussions five years later. So then they might want a bond. It stays with you like you say, it will stay with you for five years and it will affect every form of financing.

George: [15:22] We've seen that. Look, life goes on, people go through difficult times. COVID now, sad reality people will lose their jobs. People not going to make their targets, commission earners are earning half, a quarter. You're going to have a speed bump in your life, right? That is a course of life, but then you see people abuse it, they live above their means and they open credit everywhere and they actually abuse it and abuse it almost like people abuse alcohol. They abuse that thing and that's maybe a discussion for another day, but it comes from education at younger years of how we should manage our financial situations right, but once you've tarnished that we've seen people that have tarnished it two, three, four years later, it's four years later and they earning ten times more than they used to earn and they can't buy a car because they've abused, that mark is still against their name.

[16:28] So it's important that you keep those lines of communications open with the bank. Stick to what you can and irrespective you may not have to pay them the full amount, pay them 20%. Banks are also in business and they also understand this economy and they don't want to go the legal route. That's a last resort for them. It costs them too much money. So it's simple, look after your credit score, your credit history and go onto these credit bureaus. Most of them you get once a year you get a free report. Go and check your credit out.

Laura: [17:10] We actually recommend the current stage through My Credit Status is to do a monthly. It's a nominal fee to sign up. It takes you ten minutes, your report is there. Go through it, make sure everything's correct. Identity theft is also on the rise, etcetera, etcetera, just monitor it. Look after it like you say. It's the secondary thing to your health.

George: [17:30] So it's a credit health-check and you might forget to pay your account at a clothing place if you're not on debit order because you went away for the weekend. You don't sometimes realise what the percussion is of paying that late because banks want to know what your payback culture is. They're not interested really to know how much you spend on clothing or how much you spend on your cell phone account or on a car or whatever. They want to know is this person trustworthy? We say they must pay by the 25th, do they pay us by the 25th? If they can't pay us by the 25th do they engage us. I'm telling you if you engage them they're not going to put a tick against your name. They want that discussion. They want that openness. So, yes so your monthly health check thing I 100% agree with you. I would advise that.

Laura: [18:29] Now our next question is, what if the consumer comes out of debt review can they apply for vehicle finance ?

George: [18:36] Immediately, no.

Laura: [18:39] Really.

George: [18:39] No, and sadly it comes back to what I just said earlier. You have now come out of a debt review for whatever reason. You've lost your job or you abused your name or just things went wrong for you in your life. I mean this happens every day. Now people go through a debt review, progress and payback almost the debt at the pace set that's set by the debt counselor. Once they pay that off they now think okay, we're eligible to get finance. It's not the case. The credit bureaus want you to start scoring positively again so you're almost like you're getting a second chance of life, you like reborn.

Laura: [19:20] Yes, I was about to say, yes reborn basically.

George: [19:22] Now you're reborn now, but you still can't get the benefit of it because the Credit Bureau doesn't really track how you paid your debt counseling and also you've obviously hit a wobble in your life so you almost kind of flagged now. It's almost your back against the wall. So you slowly have to start that process of building score again. So it's almost like you an eighteen year old again, starting your credit score in life.

Laura: [19:52] But it is possible.

George: [19:56] It's possible. Unfortunately, in my experience, I don't see it happening sooner than six months and it can take up to about a year and that's quite simple. I mean how you could get to that is open a bank account, make yourself an account, a clothing account with a large retailer, maybe a credit card later on, so that all those companies that you've dealt with sends back a positive report on how you pay them back monthly. The amount is not what will determine what your score is. Everyone thinks if we got a big amount and we're paying it back, then the bank will give me credit because I've paid back this big amount. It's not that. The banks want to see that when your clothing account goes off on the 25th that you pay them by the 25th. The bank’s not interested about the amount. As a matter of fact, I don't even think they take it into consideration.

Laura: [21:00] It's the payback history.

George: [21:00] So, that is most probably the way to start building your credit score, is doing that. Then you also mustn't fall into the trap to be too credit active, which can also happen. So do your budget, allocate budget to cellphone, to clothing and allow a fair budget and if that's 20% of what your salary allows then those should be your repayments, 20% may be repayments towards that. So there must be a fair balance. I think that at the end of the day is what makes the banks happy. If the people are too credit active banks get nervous.

Laura: [21:46] It's a balance like you said, you actually summed it up correctly.

George: [21:50] Yes, it's the balance.

Laura: [21:52] So now okay, we actually almost discussed this, but if a consumer's struggling to pay their car payments on time, especially at the moment with COVID-19, what can they do? And I think you highlight the fact that it's open communication with the banks, is that correct?

George: [22:07] Correct.

Laura: [22:07] Instead of avoiding it and not paying it, communicate.

George: [22:11] Communicate, speak to your banks. Banks don't want to repossess cars, especially in an epidemic like COVID which is not any of our faults. We're not to blame here and unfortunately a lot of people are going to lose their jobs and unfortunately a lot of people are going to earn less money and hopefully the economy gets stimulated and starts up again. But if the banks had an aggressive approach to this, they would sit with warehouses and warehouses of cars. Banks are not in the game of repossessing cars so that's a last option to them.

[22:58] So that will be open to having a discussion with you. A lot of the banks are empathetic to the situation, clear reality. You cannot squeeze blood out of the stone, so they know this and that's why I say you speak to the bank and you be upfront with them and that's the best you can do. That discussion is the best you can do. Whether they choose to take it or not that's their decision, but I can tell you now they will be conducive to discussing and accepting what you saying.

Laura: [23:35] Makes absolute sense, yes.

George: [23:38] They don't want to take back cars. They're not in the game of taking back cars, they're in the game of finance and they understand the speed wobbles not going to last for long. People are going to get out of this and that's another thing people think it's a doom and gloom. We will get through this, especially South Africans. We're a resilient group of people, so …

Laura: [23:58] Yeah, that I agree we are pretty resilient.

George: [24:01] We're very resilient and COVID has equalised the playing fields worldwide, competitiveness. It is sad what's happened, but I think we will get through this. South Africa is a very resilient country and with this stimulus of that two hundred billion supported loan pack to the banks that will stimulate our market. We didn't have that two hundred billion injection prior to COVID, right?

Laura: [24:28] That's correct, yes.

George: [24:28] Our economy was under pressure prior to COVID anyway. Now all of a sudden because of COVID we're getting a two hundred billion injection by the banks from the Reserve Bank, a guaranteed loan scheme that the government is injecting. That will and should put a spark back into our economy.

[24:54] Back in again to start it up again.

George: [24:54] Hundred percent and some people have argued with me, but I think we will be better off post COVID than before COVID.

Laura: [25:03] Really.

George: [25:03] I'm of that opinion. You going to have two hundred billion coming into your market so now you've got two hundred billion stimulus coming in and that stimulus is going to whoever gets the loans. There's big arguments, who's going to get these loans. Irrespective of who gets it they're going to be spending money. They're going to be spending money and that money is going to be helping someone that's employed, so that person that is going to get a credit card, that person that's employed is going to want to finance a car, so I think we shouldn't be too negative.

Laura: [25:45] No, it's a good outlook to have actually for a change to have some positive outlook like you have at the moment.

George: [25:51] Yes, and I forgot to say that with Carfin the criteria's normally eight and a half thousand is the minimum salary that someone earns and the benefit with Carfin, coming through a company like us is traditionally people can only get finance through authorised dealers or these franchise dealers. Carfin allows you to buy wherever you want from. You can buy a car privately, you could buy it from a dealership that's not authorised. Obviously it goes through protocols. We do all those risk mitigation stuff for you on behalf of our client, so make sure that car’s not stolen, to make sure that it's not incumbent. We send it for Dekra AA tests or special tests to see that you're not buying a piece of scrap. So that's the benefits of what we do and then the other benefit is that we could finance a car as old as 2010, where some banks are only allowing five year old.

Laura: [27:00] That's right, yes I actually know.

George: [27:00] So especially this market now if people's affordability is dropping, they might consider not buying a newer car, maybe an older car and the nice thing with Carfin it allows you to go back as old as 2010.

Laura: [27:20] And that's a great option to have.

George: [27:22] So that's one of the options and then what's interesting we have a refinancing product that we started in 2007, where we actually get to refinance people's cars and effective with that is whatever you owe from the bank now we will pay off that loan and enter into new agreements for that same amount, over a new term of five or six years. So by doing that, you could actually, in some cases, if you've paid your car for more than two/two and a half years, some cases you could save as much as 50% of your car installment a month.

Laura: [27:56] That's a huge saving.

George: [27:58] Yes, and we brought that in those days when there was a scratch prior to the 2010 World Cup when South Africans were going through a difficult time. I started that because I didn't want people to lose their vehicles and I understood that once they do that it's difficult to get one again after that on your name. So what we did was bring in that refinancing product and most cases that affordability then saved the people on their car installments. So when you have some time go have look at the site and there's some examples of that, I actually called it like a COVID relief type of scenario where we even helped the people on their first installment they skip their first month installment, because we sincerely want to really help people. I mean, it's sad to see what's happening out in the market when we see it and I think we're in the beginning of the battle.

Laura: [28:57] I agree.

George: [28:57] July when these payment holidays are finished, the reality is over and one of my ladies, Begonia, that works here was saying what happens when the holiday is over, the reality of it. She was actually saying we should use it in our marketing which is cruel, but it's actually the truth what happens. People need to start thinking about that, but yes I think we're in for interesting times.

Laura: [29:30] Yes, unknown territory, but definitely interesting times.

George: [29:34] Interesting times, yes.

Laura: [29:36] Okay, George, thank you so much for taking part of our podcast.

George: [29:43] Pleasure, pleasure.

Laura: [29:43] And to our listeners at the end of our podcast, on our webpage, there will be a direct link to Carfin if you need to find out more about the COVID finance release he mentioned or other vehicle options, you can go directly and check out the link on our podcast page. George, thank you very much.

George: [30:02] All the best and good luck to everybody.

Laura: [30:04] Thanks a lot, bye.

George: [30:05] Cheers, bye bye.

[30:06] Thank you for listening to My Credit Status podcast. Make sure you tune into our next show where we will continue to provide you with valuable information about your credit health. We value your feedback, so we would love it if you can rate and review us on iTunes. Don't forget to subscribe to this podcast so that you can be alerted as soon as a new episode is live. Visit mycreditstatus.co.za