If the first three weeks of the year have been a grind, then I am sure you are counting down to the long weekend.
Happy Australia Day (in advance) from the team at Gusto Finance. We hope you can enjoy the summer sunshine for a few more days!
This week, we have a customer story that shows that even small actions can overcome past blemishes in your credit history.
But also points out some important limitations in the options you will have.
It was an unlikely result that the team were able to secure, and a good read.
Customer of the Week
Our customer had a low credit score (~390) and an urgent need for a new work ute.
A combination that leads to higher loan costs, or flat out rejection, depending on the reasons for a tarnished credit history.
On the positive side, he was a good earner and could service a loan no problem.
Our team got to work unpacking the credit history so we could find a lender willing to consider the application.
Obtaining Loan Approval
The challenges were:
- Two utility defaults
- Multiple wage advances
- One recent short-term loan
- Several dishonoured loan payments on his bank statements.
If anyone applied directly to a lender with this combination of factors they would be 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.
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 the loan once he meets certain hurdles.
And the savings were in the five figure range.
You can read the full comparison table here.
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.
Avoid Wage Advance Products
These apps remain in a small unregulated corner of the finance industry and are becoming increasingly popular.
Big claims are made by the various app, stating that there is “no effect on your credit file”, and that “all you pay is 5%”.
But there is so much more to this story than you may think.
There is a reality to using these services that can limit your chances of obtaining finance, or making it much more expensive.
Read the full article here