Knowing how loan defaults affect your credit score

Knowing how loan defaults affect your credit score

Despite their best intentions and efforts, many households in South Africa are adversely affected by the rising cost of living, making it challenging to maintain financial commitments.

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That being said, WesBank, a trusted partner in vehicle finance, has provided information to ensure that vehicle buyers understand how defaulting on their loans can harm their credit scores and what steps to take to mitigate the impact. 

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Performance loan defaults and credit scores

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Customers are encouraged to keep up with monthly repayments of their loans, and if scheduled payments are missed, the loan may be regarded as ‘default’. This not only negatively impacts a client's loan with their lender, but it also negatively affects their credit profile. Each missed payment affects your credit score as defaults are reported to credit bureaus, who then record this non-payment status, which then shows 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 difficult to get credit or favourable loan terms. 

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Clients with high credit score ratings are more likely to get credit, while a customer with a lower score may be less likely to get credit as they are deemed high-risk. Therefore, timely loan repayments can help boost your credit score, whereas missed or defaulted loans can cause it to decline significantly. It is therefore important to understand that your credit score isn’t just a number but a financial tool that can impact your future ability to borrow. 

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The impact of loan defaults on your financial journey

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Defaulted loans have more significant consequences on a credit score than a single missed payment. 

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Here’s what normally happens:

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• Credit reporting: When a loan defaults, credit providers notify credit bureaus, potentially impacting your credit profile for up to five years. However, once the overdue amount is paid in full, the record will be updated to ‘paid’ within seven days, gradually enhancing your credit status.
  
  
• Creditworthiness: Credit scores play a crucial role in determining a borrower's creditworthiness. A high credit score enhances your appeal to lenders, while a lower score can lead to higher borrowing costs or even denial of credit access.
  
  

WesBank’s payment arrangement functionality

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To support clients who are facing financial difficulties, WesBank offers what it calls a Payment Arrangement service. This helps resolve arrears within a reasonable time while also allowing customers to work with the company to avoid defaulting. 

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• How it works: A payment arrangement is designed to help customers settle outstanding arrears through a customised plan without modifying the original credit agreement. This option requires approval from WesBank, and customers must comply with the specified terms and conditions.
  
  
• Benefits of Acting Early: If you are already in arrears or have missed a payment, it's recommended that you contact WesBank immediately to prevent the arrears from escalating. Also, this can protect your credit score and avoid additional costs and legal consequences.
  
  

Proactively protecting your credit score

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Consistent, timely payments contribute to a robust credit score, whereas late or defaulted payments can drastically reduce it, impacting a borrower's creditworthiness for an extended period. WesBank is therefore committed to helping its clients preserve their credit and financial well-being. If you are experiencing financial difficulties, it’s best to contact the institution to explore payment arrangements or other potential solutions. By working together, we can help you navigate these challenging times, protect your credit score, and ensure you remain on track to achieve your financial objectives.

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For more information on managing your finances, including managing your debt and avoiding missed payments, visit the WesBank Talks Finance podcast.

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