Old car, higher interest rate

WESBANK: CONSUMER QUESTIONS BANK POLICIES ON USED CAR FINANCING

- Adriaan Kruger

• Response to reader charged higher interest for smaller loan than he qualified for.

Moneyweb reader posed an interesting question about banks' financing decisions when he thought he acted responsibly by opting for a cheaper used car instead of forking out nearly twice the amount for a new vehicle.

He felt the bank was penalising him with a higher interest rate for applying for a much smaller loan than he qualified for.

"Bankers, help me out here. I applied for vehicle finance for a 2015 car via Toyota. The funding was approved within minutes of the application by all the banks.

"The best rate I can get is prime. I query this because I can easily afford the vehicle. The feedback: It's a 2015 model - they won't go lower than prime.

"They will definitely consider prime minus if I buy a 2020 model or younger.

"I am asking why they are pricing the debt on the car and not on my risk profile," the reader asks, saying the banks would happily extend finance for more than double the amount he applied for.

"It seems that the business model is to reward the wrong kind of behaviour. And then they will be warning people about borrowing within their means, and punish them for taking that advice. Bizarre, or is there logic that I am not understanding?"

Older cars Banks do not shy away from financing older cars and long gone are the days that it was impossible to get financing for a car older than five years.

They even offer financing repayable over a term of eight years.

A longer term loan means lower instalments for the new car owner, and more interest income for the bank.