When you are trying to buy your first proper car, the standard advice is usually to shop around for the best deal.
But in the finance world, blindly shopping around can actually destroy your chances of getting approved at all.
This week’s case study follows a young customer who fell into this trap, tanking his brand-new credit score right before he found his dream car.
Here is how we navigated a bruised credit file, and an older vehicle, to get the deal done.
Customer of the Week
Our customer is a 19-year-old part-time farm hand from Victoria. He had his heart set on a 2010 Holden Caprice priced at $12,000.
Because the car was unique, he had to search to find the one he was looking for. A dealership in South Western Sydney the closest place he could find one.
He was more than willing to make the interstate trip to get it, but he needed the finance sorted first.
The Roadblocks
After reviewing his situation we identified two hurdles to navigate.
1. A New Credit File With Lots of Recent Enquiries
He had a middle of the road credit score in the low 500 range and no active credit elsewhere.
As is always the case with young borrowers there was not much history in his credit report and because it was so new, the score was more sensitive to activity.
Over the last two to three months, Andrew had made four finance applications trying to secure his car loan.
Those four enquiries in rapid succession were enough to damage his new credit score that would make a traditional approval much more difficult.
Which he had already demonstrated through the recent rejections (including one from a major bank).
2. The Age of the Asset
The other challenge was the age of the asset.
The Holden Caprice was a 2010 model which puts it outside the range for acceptable collateral with most lenders.
The Gusto Strategy
We had a young borrower with a low credit score, a part-time income, and an asset that was too old for standard finance.
So we needed to restructure the deal from the ground up.
- Pivot to an Unsecured Loan: Since we couldn't secure the loan against the 2010 Caprice, we pivoted to an Unsecured Personal Loan through one of our specialist non-bank lenders.
- Rely on Healthy Banking Conduct: When you have bad or thin credit a lender can rely on your bank statements to make an alternative assessment of your risk profile. This worked in his favour!
The Result
The strategy worked and the approval was secured.
Armed with his $12,000 approval, he was able to make the trip up from Victoria to Bankstown, to pick up his new Caprice and drive it home.
I just hope the petrol for the return trip cost less than the car…
The Takeaway
This week's story highlights two crucial issues:
Too many enquiries will hurt you
Every time you apply for a loan or a Buy Now, Pay Later account, it leaves an enquiry on your file.
If your credit history is short, multiple enquiries in a small window of time signal credit stress to lenders and will tank your score.
Work with a broker to find the right lender the first time.
Asset Quality Matters
The car you are buying can influence the outcome just as much as the credit profile of the borrower.
Lenders like collateral that has a long mechanical life ahead of it.
But, there is always a Plan B.
10 Factors That Lead to a Higher Interest Rate
Most lenders will offer multiple tiers of interest rates, with only the best customers able to secure the lowest rate possible.
Pricing is a reflection of how likely you are to repay the loan on time and without issue, according to their internal criteria.
The greater the perceived risk, the higher the interest rate they’ll charge to offset potential losses.
As we saw in this week’s story, sometimes there are variables that can lead to a slightly higher rate.
Read the full article here