I’ve Got Defaults – What is the Financier Thinking?
Written by: Phillip Gruppelaar
Why are Defaults a Problem?
Over the last 25 years or so, I’ve had the comment from prospective clients “It’s only a small default, what’s the problem?” or “it’s only a phone bill default, what’s the problem?”
A default is a major problem regardless of size, as it is at the very heart of the credit decision making process, in that it relates to your character. Late payment or non-payment is deemed bad credit character.
All main stream financiers (banks and finance companies) computer systems use a score card to determine whether they will approve your loan application or not. If you cannot show good character some other way. (e.g. you have good equity in your home or investment property or you hold an employment position that is highly qualified) The scoring system will decline your loan.
As a finance broker we in many cases are able to overcome defaults that are a lot more serious than the above. There are two types of approval.
1. Small Default or Utility Default – these are quite often still approved in the main stream. You will however need to show your good character traits outweigh the default/s you have.
2. Other Defaults – we are simply trying to find an approval – This finance agreement is going to cost you more as the financiers believe they are taking a high risk in lending money to you.
Credit File Errors
If you have a default on your credit file and you believe there has been an error made, you should be contacting the Credit Bureau (e.g. Veda Advantage) and the lister’ (the person who maintains you owe them money) of the default to try to rectify. Thousands of errors are listed on credit files every year.
Financiers and Creditors Believe They Have Given You a Chance
The law makes provision for “hardship” applications from people who are struggling to pay their loans or bills. Given that the organisation you owe money to makes contact with you many times to sort out payment. (e.g. Overdue Notices, Phone Calls etc.) they expect that you will tell them if you cannot pay.
The problem is most peoplewant to pay, but the person contacting you wants more than you have and you don’t understand you can ask to pay less. Remember they want their money back as quickly as possible, so they pressure you. The result is you don’t have enough to meet the agreement, so you don’t pay at all.
No payment after entering into an agreement (even if you felt the agreement amount was too high) results in a default.
What Are Financiers Really Thinking About You When You Have a Default?
The reality is that whatever you tell a financier about your default they don’t actually believe you.
Utility Bills – No Utility company defaults a client for being less than 67 days late, if you have entered into a payment plan provided you stay close to the agreement they do not default you.
We commonly here, I moved and I didn’t receive the bill. This excuse is never accepted. Everyone knows they owe money when they move for electricity, phone, gas etc. The person concerned was just too lazy to inform the utility company of their new address.
Credit Cards – Banks and Credit Card providers are the most forgiving of any financial organisations. They give every possible chance to repay. They have no security (e.g. car) that they can recover to fall back on, their only hope of recovering their money is to keep you paying something. They will cancel your card, but if you are paying anything you will not be defaulted.
Consumer Loans (Personal Loans, Bad Credit Car Loans etc.) – These loans give you protection from default by law. It is a minimum of 67 days without any payment at all before default action can be commenced. These lenders send letters, make phone calls etc., they make every attempt to find you and find an agreement to let you continue paying without a default being listed.
Banks, Finance Company’s & Utility Company’s don’t want to list people as being in default. Everyone loses if you don’t pay. They could be a lot more lenient when trying to recover money, but they want their money back. If you can’t afford to pay, you need to tell them. You can then find an agreement. You will have a poor credit rating with that organization, but only they will know. This leaves you plenty of other organisations available next time you need money.