A $2,500 Default + Casual Job. Approved!
Getting an approval on your car loan is usually a moment to celebrate. But what happens when that initial approval comes back with a higher interest rate than you wanted?
The secret is knowing exactly which problems to solve first to make the biggest impact on your result.
This week’s case study perfectly highlights this strategy.
It shows the tough reality of how lenders view unpaid credit defaults, but more importantly, it shows why taking a step back to strategically fix elements of your credit file can save you thousands of dollars down the line.
Scenario
Back in January, a customer reached out to us all he way from Devonport in Tasmania.
He needed a car loan, but his profile was in a tricky spot on two counts.
He was only 2.5 months into a new casual job, and he had an outstanding $2,500 default from an old credit card. His credit score was sitting just below 430, which is at the lower end.
We took his application to the market and still actually managed to secure an approval!
However, because of his short employment history and the unpaid default, the only lender willing to take the risk offered a very high rate around the 25% mark.
Our customer wasn’t thrilled with the rate, but any approval in this situation is still a win. However, we knew we could do better with some small changes.
The Roadblocks
Instead of encouraging him to sign the contract, we discussed the broader options if some of the major detractors from his profile were addressed.
The two solutions to consider were:
- Wait for longer tenure: Stay in your casual role until you hit the 6-month mark. This drastically opens up the number of lenders willing to look at your file.
- Repay the defaulted debt ASAP: Pay off the $2,500 default so it changes from “Outstanding” to “Paid” on your credit report.
He took our advice on board, put his head down, and returned to us four months later in May with the default fully paid off.
While this only led to a moderate lift in his credit score (a big lift takes time), he would now be eligible at a greater number of lenders.
The Gusto Strategy
Because his bank statements were also healthy (consistent income and no payday loans), we had a solid foundation to work with.
The customer also had the desire and capacity to pay off the debt quickly and needed a lender with no major early repayment fees.
We knew the perfect lender on our panel who specialised in this end of the market and were able to secure an improved rate just under 20%.
While this may still sound high, for a credit score in the 400 range, it is the best you can get.
And with a minimal early payout fee, the customer now has a clear objective and will save money with every extra dollar that goes towards the loan.
The Result
We secured the approval for a $27,990 2017 Ford Ranger, and the loan was settled in no time.
By strategically targeting the two biggest problems holding his profile back, he was able to secure a much better finance offer in the shortest possible time.
The Takeaway
If you have a default or a short work history, rushing into a loan can lock you into expensive, yet avoidable, rates.
A great broker will look at your file, tell you the honest truth, and build you a strategic roadmap to solve the right problems and get you into a much better position down the line.
This issue comes up frequently in our case studies, and we are always okay telling someone to wait if there is a genuine pathway to a better outcome.