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Monday, December 01, 2014
Looking to lower his car repayments to manage his cashflow a little better, Dan Simpson didn't realise that the payday loans he had been using to get through a difficult period would jeopardise a loan application.
Dan Simpson had been struggling to make repayments on his car loan for some time, and had resorted to 'payday loans' – quick, unsecured cash at high interest rates for short periods – to meet his financial obligation.
Unfortunately, after taking such a loan once and then repaying it, and without a plan to deal with the next month's loan repayments and living expenses, 25-year-old Dan found himself in an expensive cycle of unsecured loans.
"Dan came to me to refinance his car loan and to stretch the term out," says his MFAA Approved Finance Broker, explaining the plan that Dan thought would lower the repayments he would make each month by increasing the length of the loan. "We bundled it all up and referred it back to the lender that Dan was already dealing with."
What should have been a straightforward refinance, however, became difficult when the lender rejected the application based on a high number of recent credit enquiries on Dan's record, despite Dan having told his Finance Broker that he didn't have any other loans or credit cards.
"He had 27 enquiries on his account within a 24-month period," his Finance Broker says. "He was unaware that payday loans would come up on his credit file, so when we had asked him if he had any other personal loans, any credit cards, he said he didn't."
Payday loans are a clear sign of financial distress, and are very poorly regarded by lenders assessing a loan application, so Dan's Finance Broker was not able to secure finance in the short term.
"When we come up against those cases where there is literally nothing that we can do, we look at how we can educate the client about where they are at and how we can help build a strategy for them to get out of the situation," Dan's Finance Broker explains.
Putting people on a path to being able to secure finance is part of what Finance Brokers do. Dan's Finance Broker also complements that by recommending that the client speak to a financial counsellor who can help them negotiate their debts and discuss the bigger picture aspects on financial responsibility.
"What these people are dealing with is the sort of thing they go to sleep thinking about and wake up thinking about. There's a lot of stress and burden with that," Dan's Finance Broker says. "So I try to make sure that they have access to a list of financial counsellors, and make suggestions about who I've heard is good from feedback, but leave the decision up to the client."
*Clients' names have been changed to protect their privacy.
An MFAA Approved Finance Broker is part of the puzzle to help you get back on track if you find yourself out of your depth, and they can help you find solutions and make plans that will avoid jeopardising your credit record
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Source: The Mortgage and Finance Association of Australia (MFAA)