If you have previously defaulted on a payment obligation, your credit file could be marked wth a default listing.
This will hurt our credit score and place you in a higher risk category for the duration of the default period.
But did you know that a lender can also see the current status of that default? If you have taken steps to pay it, then this is a big step to lowering your risk profile in the eyes of a lender.
In this article, we will discuss the different categories of default and how they will be treated by a potential car loan lender.
What is an Unpaid Default?
An unpaid default is a record listed on your credit file that indicates you have not met your repayment obligations on a loan, bill, or other contractual obligation.
Most will be familiar with a financial default where you have fallen behind on payments due for a loan or credit card.
However, many are not aware that you can also be defaulted when you fall into arrears on your power bill, phone bill, or other services where there is a contractual agreement.
If you are applying for a car loan with unpaid defaults, then the type of default may be treated differently by a lender.
Financial Defaults
A financial default effectively tells the lender that you have borrowed money in some capacity and not repaid as per your loan agreement.
Personal loans, car loans, credit cards, and mortgages would all fall under the category of a financial default.
This is not a good sign for a lender, and it can be very challenging to be approved for a loan when you have an unpaid financial default.
Utility Default
Some lenders will be more lenient if the default is for a utility or unpaid service.
It is still an indicator that you may be higher risk than the average borrower, and it will hurt your eligibility with some of the cheaper loan products out there.
But fewer lenders will reject you based on this alone.
Events that Lead to a Payment Default
Missed Payment
If you have missed a payment by a few days, then this is only a minor hiccup and this should only be visible to the lender.
As long as you take rapid action to correct the problem, then there will be no long term consequences of the missed payment.
If you remain in arrears for longer than 14 days, then it may become visible to other lenders via your credit report.
Payment Arrears
If you fall into arrears against your repayment schedule, then this may be visible on your credit file.
Most lenders in Australia now participate in Comprehensive Credit Reporting, which includes a monthly status of your outstanding loans.
If you are in arrears, it will show this for the length of time you are behind.
The faster you correct the problem, the better. If you leave it too long, then you are at risk for a formal default listing.
Payment Default Listing
A lender will only list a default on your credit file after they have gone through a lengthy process to resolve the situation.
This is likely to include:
- Multiple notices that you have missed a payment and are in arrears
- Multiple attempts to make contact with you via phone, SMS, email, and post
- A notice of default warning you of the action
By the time you are defaulted, you have had fair warning.
If you then repay the debt, your default listing will be updated to reflect the Paid status. So any potential lender can see if you have eventually done the right thing.
If you have not paid the debt in full, it will remain an unpaid default.
How Long Will a Default Stay on Your Credit Report?
A default will remain on your credit report for five years.
The status of the default will be updated when it changes, though. It is vital for your future financial prospects that it is updated to paid as soon as possible.
Lenders will take this into account and it shows that eventually you were able to do the right thing.
Paid vs Unpaid Defaults
Any risk assessment that a lender completes is a spectrum with a wide range of outcomes. Every positive factor can be the difference between a rejection and an approval.
However, some factors will lead to an instant decline.
In the case of a paid or unpaid financial default, the vast majority of car loan providers will not consider an application where there are unpaid financial defaults.
The good news is that if you can show that you have repaid the outstanding loan in full you can apply for a car loan immediately.
But the damage to your credit profile is done, and you are likely to be limited to a bad credit car loan.
Some may be more forgiving of a utility, but you are still going to be in a higher risk category.
Why Some Lenders Are More Flexible Than Others
We deal with non-bank lenders whose entire business model is based on customers with a poor credit history.
They are able to identify positive financial behaviours outside of your credit file that can improve your chances of being approved.
Most of these lenders will require 90 days of bank statements to be included in your loan application.
Every transaction will be analysed to identify both positive and negative indicators as to your level of financial responsibility and capacity to take on a car loan.
The good news is that there is a lot you can do to present strong bank statements to a potential lender.
You can learn all about this here.
Follow the steps, and you will improve your chances of being approved despite having previous defaults.
What to Do If You’ve Already Been Rejected
If you have applied for a car loan and have been declined due to unpaid defaults or an otherwise poor credit history, then get in touch with Gusto Finance below.
Our broker team can help in the following ways:
- Quickly identify if there is a lender who will accommodate your current situation.
- Provide guidance on how to improve your application and how long it may take for you to be eligible.
- Assess any unpaid defaults and if they are deal breakers for a lender or not.
Click below to get started.
Conclusion
While you should always try and meet your repayment obligations before taking on additional debt, circumstances may dictate that you need a car now and cannot wait!
Not all unpaid defaults will be treated equally by a potential lender, but you need the industry knowledge of a broker to navigate what will be a tricky application process.
