Home loan payments take back seat to cars payments in crunch times
Consumers may opt to repay a car loan over a home loan because of the payment required, access to other forms of credit and even what they believe the consequences might be of the skipped payment
Financially distressed South Africans are prioritising their vehicle loan repayments over their home loans, contrary to general expectations, a credit bureau’s research shows.
TransUnion tracked the payment behaviour of about 325,000 credit-active consumers who had at least one credit card account, one vehicle loan and one home loan to see what happened when they were unable to meet all their credit commitments, and how they prioritised payments.
Conventional wisdom suggests that when consumers do not have enough to meet all their obligations, credit-card payments would be first to be dropped from the payment list, followed by vehicle loans and only then would consumers skip repayments on their home loans.
Carmen Williams, director of research and consulting for TransUnion SA, says the bureau expected to find that consumers would only stop paying their home loans in the direst of circumstances, and that these payments would be prioritised above all other types of debt.
This is because missed payments on a card do not put any important collateral at risk, vehicles are often essential for daily activities, and homes are the centre of one’s family life and your most important asset, she says.
However, the TransUnion study showed that consumers generally prioritised vehicle loan payments ahead of home loans. Credit card repayments, as expected, were the most likely to be missed, she says.
Williams says the reasons consumers may be choosing to repay a vehicle loan over a home loan may relate to the size of the payment required, access to other forms of credit and even what consumers believe the consequences might be of the skipped payment.
The average vehicle loan has a lower monthly payment compared to a home loan, therefore missing a home loan payment will generally give you more cash flow relief and enable you to meet other obligations.
The timing of any perceived consequence might also be a reason consumers repay their car loans before their home loans. Consumers are likely to realise that a vehicle could be repossessed relatively quickly after missing just two or three payments, whereas eviction because of default on a home can often take many more months or even years.
Finally, a vehicle may be the primary transport to work, or even looking for work if suitable public transport options aren’t available, making continued access to a car critical to preserving your source of income.
When people miss a payment, it is often because of significant life events — loss of a job, a relationship breakdown, illness or even other unexpected bills, says Williams.
In these cases, consumers do not choose whether they want to pay or not, but rather make decisions to maximise the utility of their scarce funds.
David O’Brien, MD of Meerkat, a new-generation financial wellness business, says if you are facing financial hardship, the first thing you should do is inform the lender.
Lenders are in business and are willing to discuss amended terms if you are facing temporary financial difficulties. Exactly what concessions they will be willing to make will depend on your financial situation and how long your difficulties are likely to continue.
Mortgage lenders are also willing to assist you if your situation is more permanent. For example, First National Bank has a programme called QuickSell to help distressed homeowners to sell their homes.
Don’t forget that you may have credit life insurance with retrenchment and disability cover for your debts that you could claim, he says.
Remember when you consider skipping a payment that credit providers report your missed payments to the credit bureaus that track your payments across all your accounts over a 24-month period, O’Brien says.
Every payment you miss will impact your credit score, he says. One missed payment may not affect your ability to obtain credit, but six almost certainly will and the cost of this is higher interest rates on your credit in future.
The National Credit Regulator estimates that of the 20-million credit active consumers, there are about eight-million in financial distress, he says.
How to deal with financial stress
If you are under financial stress, don’t put your head in the sand. Lisa Griffiths, associate director at BDO Wealth Advisers, suggests the following tips:
- Deal with the problem; otherwise it will get worse every month.
- Understand that it could be unpleasant, but that it will be a whole lot more unpleasant and protracted if you do nothing.
- Call a meeting of family members and explain the situation. Every member of the family needs to understand the situation and buy into the measures you put in place.
- Take whatever steps possible to get your budget to fit your income and your plan to reduce debt. You will either have to increase your income or decrease your expenses, or both. There are no sacred cows — you need to critically examine every expense.
- When you have a workable plan, communicate that to your creditors.
- There is no silver bullet: it will take time and effort to resolve the problem, but it will be worth it.
- Stick to the plan.