In general, our society relies heavily on credit for the purchase of cars, homes, funding our education and parts of our lifestyle.
In the engagement with credit providers, their assessment of how much credit to advance applicants is largely consistent but evolves as consumers take on more credit or as recent data on their credit repayment history becomes available.
There are instances where consumers find themselves able to afford to purchase a car for R1m but not a house for R1m. A situation of this nature leads to confusion and misunderstanding. In some cases, conspiracy theories go as far as to suggest there could be an element of racial profiling. The bottom line is that this is a myth and can be explained with logic and consideration for each consumer’s situation and financial standing.
For example, let’s consider a situation where you as a loan applicant have enough disposable income to afford both the R1m car and the R1m house at the same time. In this situation, the bank will loan you the money to purchase both items.
The challenge is when your disposable income does not allow you to purchase both assets at the same time, then it’s about a choice between the car or the house. This is typically when one or the other loan application can be declined.
For argument’s sake, say you earn R30,000 after taxes, with no other expenses, and you decide to buy a car worth R1m. You will be paying R17,000 per month over 60 months at 20% residual payment and 0% deposit payment (and that does not even include insurance and running costs such as petrol).
That’s already more than half of your disposable income committed to making monthly car payments. This is generally not a good idea and is probably not the best use of your disposable income.
On the other hand, if you earn R30,000 after taxes and you decide to buy a house worth R1m, you will be paying about R9,000 per month – that’s less than 30% of your disposable income. Even if you added the cost of insurance and maintenance, it’s still manageable for an asset of that size.
Now, if you were to combine the purchase of the R1m car at R17,000 per month, the R1m house at R9,000 per month and the cost of insurance for both assets (and yes, petrol) that comes to R4,000 per month, you probably wouldn’t have R1 to spare.
If you apply for the R1m home loan after the purchase of the R1m car, the bank is likely to decline your home loan based on your lack of affordability, resulting from 50% of your disposable income being committed to a contractual debt and other likely debt commitments.
The point is, life is about choices and priorities. Therefore, the sequence in which you make any R1m loan request – either for the car or the house – will determine what gets approved first, should affordability be a factor in your application.
In general, it is recommended that you purchase the R1m house in order of priority, given that the R1m home loan can be converted into an asset that can appreciate over time, in comparison to the R1m car that depreciates in value over time.
At the end of the day, the final decision is always yours. However, always bear in mind the long-term effects of your decisions, even when it comes to buying your next asset.
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