When Small Steps Improve Credit Prospects
Having a battered credit history can feel like a dead end, especially when you need a vehicle to keep your business running.
Recently, a customer came to Gusto Finance with a 390 credit score and an urgent need for a new work ute.
While many lenders would see this as an automatic No, we saw the pathway to an approval now, and a financial recovery in the future.
Here is how we turned a likely rejection into a win for a customer from Narre Warren, on the south-eastern outskirts of Melbourne.
Navigating the Red Flags
When applying for finance with a low credit score, the details matter.
Our client’s bank statements and credit file presented several hurdles that would cause most automated systems to decline the application instantly.
The challenges were:
- Two utility defaults
- Multiple wage advances
- One recent payday loan
- Several dishonoured loan payments on his bank statements.
If this customer had applied directly to a bank, they would have been rejected immediately.
Whereas a broker can provide much needed context beyond how things look on paper.
There were some positive steps taken by the customer that indicated he was getting back on track:
- The defaults were not for financial products, and had been paid in full.
- Dishonoured loan payments had also been caught up, so no arrears to consider.
- The short term loan had also been repaid in full.
Some lenders will consider this action as enough to offset the risk presented by the credit history alone.
But the wage advances were a sticking point.
Finding the Right Lender
We looked closely at 8 different lenders to see where this may fit, and found just one where it was more than a maybe.
We had an in-depth conversation with the lender on each of the blemishes on the credit file, and the action taken to correct them, including the influence of the holiday season on his spending habits and we were able to secure an approval.
However, the rate was high.
North of 20%, but it was unavoidable in this case.
While this is hard to swallow in the short term.
This is where part 2 of this story is needed.
The Exit Plan
Our customer is expecting a substantial lift in his earnings over the next 12 months.
Unfortunately, a lender is legally obligated to assess your application on today’s earnings and cannot take future eventualities into account.
The loan term was 7 years, which would add up to a huge interest bill if it went the full term.
But, with his credit file on the improve and his earnings also likely to increase we also showed the customer a scenario where he could refinance to a better rate loan once he meets certain credit score hurdles.
If we also consider the increased earnings we can then shorten the loan term to three years once he refinances.
So, two years on the current rate followed by three more at the lower rate.
And the savings were huge!
Check the table below for the full summary:
| Scenario | Interest Rate | Loan Term | Total Interest Paid |
|---|---|---|---|
| Current Loan | 20% | 7 years | $30,286 |
| Refinance after 2 years | 20% -> 12% | 2 years + 3 years | $18,273 |
| Savings!! | - | - | $11,556 |
A Holistic Solution
At Gusto Finance we believe in finding the best solution today, but also having an eye on the future.
The current need was a work vehicle as soon as possible. This would then create the opportunity to improve financial well being all round, despite the cost.
As finances improve, so does access to opportunity.
Which means access to lower rates, and more favourable terms.
Our customer is now on a better path, and will never face the same problems again if he sticks to the plan.