Car finance with defaults in NZ

What a default is, and why lenders care

A default is a record that a debt went unpaid for long enough to be reported. In credit reporting terms it is generally a failure to pay that has gone to debt collection. It might be a car loan, a credit card, a phone plan, a power bill or an old store account. For a lender weighing a new car loan, it is a sign that repayments have gone wrong before.

The detail matters, though. A single small default from years ago that has since been paid reads very differently from three recent ones. This page is about the middle ground: you have defaults, you are not bankrupt, and you want to know what to do. If you have been bankrupt or had a No Asset Procedure, see our pages on discharged bankrupts and life after a NAP instead.

Fair Finance is a referral service, not a lender. Nobody on our side can promise approval, and the lender makes the final call.

How long defaults stay, and what changes when you pay

Equifax’s rights explainer says adverse information, meaning collection data, default data, summary instalment orders and judgments, remains on your credit file for five years. Previous enquiries stay for four years. So a default listed three years ago still has two years to run, whether or not you settle it today.

Paying does help in two ways.

• It updates the entry. A paid default can stay on file, updated to show the later development, because the file is supposed to be an accurate record. The entry shifts from “unpaid” to “paid”, which tells a lender the debt is not still hanging over you.
• It stops the pattern. An unpaid default may still be chased by a collector, may grow with fees and can lead to a court judgment. Settling it limits the damage.

If you can only pay part, ask the creditor or collector in writing for a payment plan and keep to it. A record of on-time instalments is better than a promise.

Check your file before any lender does

You can get your file free from Centrix, Equifax and Experian (formerly illion). Equifax’s free version arrives by post within ten working days, with a paid express option if you need it faster.

When it arrives:

1. List every default: who it is from, the amount, the date listed and whether it shows as paid.
2. Cross-check each against your own records. Look for debts that are not yours, amounts that are wrong, duplicates across the three bureaus and debts that were paid but still show as unpaid.
3. For anything wrong, contact the credit reporter and ask it to correct the entry. Put the request in writing and keep a copy.
4. For anything right but unpaid, contact the creditor or collector.

This takes an afternoon and can change what a lender sees. Our guide on improving your approval odds covers more of the clean-up.

Not all defaults look the same to a lender

Lenders weigh several things at once.

• Recency. A default from four years ago is a different story from one from four months ago.
• Number and pattern. One default can be a bad patch. A string of them across different creditors suggests an ongoing problem.
• Size. A $200 phone bill is not the same as a $9,000 car loan.
• Type. A previous car loan default, particularly one that ended in repossession, makes a lender look harder than an old utility bill. See car finance after repossession.
• Paid or unpaid. Settled usually helps.
• What has happened since. Steady income and a run of on-time payments are the best evidence that the cause is behind you.

You may also have a court judgment on file, which is separate from a default and has its own treatment. The lender will see both.

What helps most

1. A recent history of paying on time. Rent, power, phone and any current loan.
2. Provable income. Payslips, or three months of bank statements if your pay varies. See minimum income for car finance.
3. A deposit. Even $500 to $1,000 shows commitment and reduces the loan.
4. A realistic car. A cheaper, reliable car makes the affordability check easier. Lenders are legally required under the CCCFA to check you can afford repayments, and a smaller loan is easier to pass.
5. A short explanation. If the defaults came from redundancy, illness or a relationship breakdown, say so in a sentence or two. Do not write an essay.

A worked example (illustrative only)

These are round, made-up numbers to show the maths. They are not a quote.

You have two paid defaults from three years ago, and you have been paying everything on time since. You want a $7,000 car and have $1,000 saved, so you need to borrow $6,000. At an example rate of 24.95% over 36 months, repayments come to roughly $238 a month, and you would pay about $8,580 in total, around $2,580 of it interest.

Now compare a lower example rate of 19.95% on the same loan. Repayments fall to roughly $223 a month, about $15 less, and total interest drops by around $550. That is the gap a better file can be worth. Ask any lender whether there is an early repayment fee, so that you can refinance or clear the loan when your file improves. Use the repayment calculator to test your own figures, and keep room in your budget for rego, insurance and fuel.

Red flags

• A lender or dealer that treats your application as a done deal before looking at it.
• Pressure to sign the same day.
• Fees or add-ons you were not told about up front.
• A car priced well above its market value, with finance bundled in.
• Any quote that will not show the total cost of credit.

Under the CCCFA a lender must be upfront about costs and must check affordability. If a deal feels wrong, ask for the paperwork and take it away for a day. You can also check the car for money owing with a PPSR check.

Cheaper routes to consider first

• Good Shepherd Good Loans. No-interest, fee-free loans of up to $7,000 for a car, with income limits and other criteria. Check their page for who is eligible.
• MoneyTalks. Call 0800 345 123 for free budgeting help and for someone to speak to creditors for you.
• A cheaper car or a cash purchase. If your defaults are recent, a smaller purchase now and a better loan later can cost far less overall.

A simple 30-day plan

If you have defaults and a car is not urgent today, a month of preparation can change the result.

1. Week one. Order your reports from all three bureaus and list every default. Dispute anything inaccurate in writing.
2. Week two. Contact the creditors or collectors behind the genuine ones. Ask for the balance, a payment plan if you cannot settle, and written confirmation once a debt is paid so you can ask the bureau to update it.
3. Week three. Build a weekly budget that includes a car. Find your honest repayment ceiling, and set your deposit and maximum price below it.
4. Week four. Gather payslips or bank statements and then make one application route, not several. A single soft check across a panel avoids a trail of hard checks.

If the defaults are old and settled and your income is steady, you may not need the month at all. If they are recent and unpaid, the month is usually worth it.

Small loans to rebuild, payday lenders and quick fixes

When people want to look better on paper they sometimes take a few small loans. With defaults on your file this often makes things worse. Each application leaves an enquiry, and a run of enquiries, especially from payday-style lenders, can read as a sign of financial strain. If you want to rebuild, pay what you already owe on time and let the months pass. Payday loans carry very high fees and interest and are a poor last resort.

A guarantor or joint applicant

Some lenders will look more favourably on an application with a second person who has a stronger record and is willing to sign. Be clear about what that person takes on. A guarantor becomes legally responsible for the amount outstanding if you seriously default, and a joint borrower is liable for the whole loan from day one. Ask them to read the contract before they sign, and do not ask anyone to take that on unless you are confident the repayments are affordable. See joint and guarantor car finance for the detail.

Never pay before you understand the deal

Be cautious of anyone who asks for money upfront before they have told you who the lender is, what the loan costs and what the agreement says. A genuine broker or lender explains the costs and the contract before you pay anything beyond what the contract itself lists.

How Fair Finance helps

You answer a few questions once and we run one soft credit check. It does not affect your score and other lenders do not see it. We then refer you to lenders on our panel who work with applicants who have defaults. A hard check only happens later, and only if you choose to go ahead with a specific lender. If the honest answer is to fix an entry or build up a few months of clean payments first, we will say so. Start with the eligibility check or see how it works.

General information only, not financial advice.

Sources

• Equifax: Your rights explained (credit file contents and retention)
• Equifax: Summary of rights (correcting and accessing credit information)
• Consumer Protection: Loan for your car
• Good Shepherd NZ: Good Loans
• MoneyTalks