Establishing a reliable track record of repayments when you owe money is a key foundation of the credit system in Australia.
This is why credit files exist, and increasingly, why lenders also insist on viewing bank statements that show your recent repayment history when you apply for a car loan.
But, will a missed repayment make you ineligible for a car loan? As is often the case in finance, the answer will depend on a range of factors.
In this article, we will explain why not all missed payments are treated equally and what you can do to clean up your record prior to applying for a car loan.
In This Post:
What is a Payment Reversal?
A payment reversal occurs when a direct debit payment is processed from your bank account and the funds in the account is insufficient to cover the payment.
Your account would briefly go into a negative balance before the payment is reversed – often incurring a hefty fee from your bank for their troubles.
This is not a good sign that you are managing your money effectively and lenders will pay attention to this.
But, not all reversals are the same.
Types of Reversals
The biggest differentiator is whether the payment reversal is related to credit or not. This is called a financial reversal.
While other missed payments still matter, a financial reversal may see you excluded from credit unless you take swift action.
Financial
A financial reversal is related to all types of credit. This could be a mortgage, personal loan, or credit card repayment.
This is a red flag for lenders for multiple reasons:
- You owe money and are not sticking to the repayment schedule.
- If you miss a payment you will owe arrears payments in addition to your future scheduled repayments, placing additional pressure on your budget.
- Reversals may incur fees from both your bank and lender. Amplifying the pressure on your budget.
This all adds up to you presenting as a higher risk than someone with zero reversals.
Non-Financial
While it is still not a good sign that your last electricity or phone payment has reversed, it is not credit-related and lenders may be more forgiving of this depending on how often it has happened.
You may still have to explain why this happened, and potentially show proof that a large balance is not owed on the account.
Consequences of a Payment Reversal
The consequences of a payment reversal will mostly depend on what you do next. Your highest priority should be making up the missed payment as quickly as possible.
The longer you leave it the more severe the consequences become.
Loan Eligibility
If you have a financial reversal and are in arrears on an existing loan then you will not be eligible to apply for further credit.
Your car loan application will be flat-out rejected by all lenders if you have a current arrears balance. So pay that first no matter what!
Once you have corrected the issue there are some lenders who will still consider your application. But your options will be fewer than someone with exemplary credit.
Credit File
There are two credit systems currently operating in Australia. Comprehensive Credit Reporting (CCR) and negative credit reporting.
- Comprehensive – includes the status of current loans and whether you are up to date or behind in repayments, plus all associated negative credit reporting instances.
- Negative – Only records significant events like a formal payment default, court judgments, and insolvencies.
This is important to know because if you miss a payment the clock is ticking to correct this before it appears on a comprehensive credit report.
Lenders all have a small window of tolerance where you can repay this with no mark appearing on your comprehensive credit file (but it’s not long!).
The majority of auto lenders utilise CCR when making credit decisions. So take immediate and swift action to prevent future problems.
Fees
As mentioned earlier, every payment reversal will incur a fee from your bank. These can add up fast if you have multiple reversals and can leave you with a negative balance in your account.
What you should also consider is that most loans will have additional fees or interest payable when your account is in arrears.
These can also add up fast!
Banking Transaction History
When applying for a car loan most lenders will require 3-6 months worth of bank statements.
Payment reversals will be easily detectable, even if they do not affect your credit file. The good news is this is easier to fix, but we’ll get to that later.
What to do if I Miss a Payment and Need a Car Loan
Not all hope is lost if you miss a repayment on a loan while also planning on buying a new car.
You will still be eligible if you take the following steps.
1. Contact the Lender Immediately
As soon as you notice the reversal, call your lender to notify them that you are aware of the reversal and will be taking steps to correct the error.
Clarify what the grace period is before it shows up on your credit file and make sure that everything is taken care of within that period.
2. Pay the Missed Payment
If you have done this prior to step one then make sure you provide a record of the payment to your lender so they have a record of it.
Otherwise, make the payment as soon as you can and provide a record of the payment to your lender.
This could be important just in case there is an administrative error and your credit file is affected. It is rare, but it happens! So protect yourself.
3. Speak to your Broker
The reversal will be evident on your bank statements and you should speak to your car loan broker to navigate your application to ensure the best outcome possible.
Our expert brokers will know what lenders you will still qualify with, and can proactively explain the reversals to the lender and what has been done to fix it.
This will look far better to the lender than if they discover the reversals and have to question it.
How Many Reversed Payments will Ruin my Application
Your application will be affected by a single payment reversal with some lenders. Other lenders will tolerate a limited number depending on the other factors we have discussed.
As a general rule of thumb, every reversal will be scrutinised and is going to reduce your options for auto finance.
If you have five or more payment reversals on your bank statements you are unlikely to be approved for a loan.
This number may be much smaller if they are financial reversals. But it really is dependent on your overall financial health, credit record, current status of existing loans (remember, no arrears!), and how well we can proactively explain what happened and what was done about it.
What if I Have Damaged my Credit File
If you have missed the above steps due to tougher circumstances or past mistakes then not all hope is lost!
Your options will be limited, and the cost of a loan will be higher, but there are still lenders who will consider customers who have missed payments and even incurred formal payment defaults in the past.
What matters most in these circumstances is your more recent financial record. If you can demonstrate the following then you will have a much stronger chance of being approved:
- All loan arrears have been paid (this step is critical – you must be up to date).
- You have control of your expenses and can evidence disposable income that can support the car loan you want.
- You have not recently been applying for payday loans or wage advance products.
Again, speak to your broker so they can assess your current situation and guide you through what will be a tricky application process.
Auto Finance Legal Obligations
So far we have focussed on a lender’s desire to get paid back. Doesn’t make sense to lend to people already struggling to repay their debts right?
But did you know there are also strict legal regulations that a lender must comply with when lending money?
Car lenders are obligated by law not to lend to anyone who may be at risk of “substantial hardship”.
If you are regularly failing to meet your existing financial obligations then the risk of hardship is high, and approving a loan could be a breach of the law.
Unless you can demonstrate an improving track record then a lender has no incentive to lend you the money.
The Good News About Bank Statements
A lender is only going to look at 90-180 days worth of bank statements. So, if you had a bad week that was a one-off event then there may be no long-term consequences.
If you have quickly made up all repayments and there are no further reversals then after 90-180 days your bank statement will be looking fresh and squeaky clean!
Conclusion
Payment reversals are a strong warning that someone’s financial health is at risk and a lender will look very closely at every instance when you are applying for a car loan.
However, you always have options and a skilled broker will be able to provide a full assessment of your current eligibility and what deals may still be available to you.
