Despite the best intentions and efforts, it can sometimes be challenging to stay on top of financial commitments, especially with the rising cost of living impacting many South African households. As a trusted partner in vehicle finance, WesBank aims to ensure that car buyers are aware of how loan defaults can affect their credit scores, and what steps to take to minimise the impact.
Understanding loan defaults and credit scores
“When you take out a loan, it’s essential to keep up with monthly payments,” says Lebo Gaoaketse, Head of Marketing and Communication at WesBank.
If circumstances arise where the scheduled payments are missed, the loan may enter ‘default’ status. This not only impacts the customer’s loan with their lender but also has broader effects on their credit profile.
“Defaults are reported to credit bureaus, and each missed payment affects your credit score. Credit bureaus record this default status, and these entries can appear on the borrower’s credit report for up to five years. This means that future lenders will see you as a higher risk, making it more challenging to obtain credit or favourable loan terms,” says Gaoaketse.
A high credit score signals to lenders that you are a responsible borrower, while a lower score can indicate a higher level of risk. Timeous loan repayments boost your score, but missed or defaulted payments can cause it to drop, sometimes significantly.
“It’s important to understand that your credit score is more than just a number—it’s a financial tool that can impact your future ability to borrow,” he states.
The impact of loan defaults on your financial journey
A loan default has more severe consequences on a credit score than a single missed payment. Here’s what typically happens:
- Credit reporting: When a loan defaults, credit providers notify the credit bureaus, which may affect your credit profile for up to five years. However, once the overdue amount is paid, the record will show as “paid” within seven days, improving your credit status over time.
- Creditworthiness: Credit scores are a primary way lenders assess a borrower’s creditworthiness. The higher the score, the more attractive your profile is to lenders. A lower score may result in credit approval at a higher cost or may prevent you from accessing credit altogether.
WesBank’s payment arrangement functionality
To support customers facing financial challenges, WesBank offers a Payment Arrangement service to help resolve arrears within a reasonable time frame. This service allows customers to work with WesBank to avoid defaulting entirely, which can prevent long-term negative impacts on their credit score.
- How it works: Payment Arrangement does not alter the original credit agreement but instead assists customers in clearing arrears through a tailored plan. It is subject to WesBank’s approval, and customers must agree to the service’s terms and conditions.
- Benefits of acting early: If you are already in arrears or think you may miss a payment, contacting WesBank early can prevent arrears from escalating. Acting promptly can protect your credit score and avoid additional costs and legal consequences.
Proactively protecting your credit score
Regular on-time payments help build a strong credit score, while missed or defaulted payments can significantly lower it, affecting a borrower’s creditworthiness for years.
“WesBank is committed to helping our customers maintain their financial health and credit profile. We encourage anyone experiencing financial hardship to reach out to us to discuss a Payment Arrangement or other possible solutions. Working together, we can help you navigate challenging times and protect your credit score, ensuring that you stay on track to meet your financial goals,” Gaoaketse concludes.
