Car finance after defaulting on a car loan in NZ

Why a car loan default stands out

A lender looking at a new car loan application sees a record of how you handled the last one. A default on a phone bill says one thing. A default on a car loan says you stopped paying on the same type of debt you are now asking for, and the lender may also have held the car as security. That is why this page is its own topic.

This page is about the loan that went wrong and the car is not necessarily gone. You might be behind now and still driving it, you might have handed it back, or the account might be quiet with a default on file. If the car was repossessed and sold, see our page on car finance after repossession as well.

Fair Finance is a referral service, not a lender. We cannot promise approval, and the lender decides.

How a missed payment becomes a default listing

Missing a payment and being listed are different steps. Under the Credit Reporting Privacy Code, a debtor credit default requires all of these:

1. The payment is at least 30 days overdue.
2. The lender has told you and asked you to pay it.
3. The lender has taken other steps to recover it.
4. The overdue amount is $125 or more.

Your repayment history is tracked separately, and in a different way: a late payment of a few days can be recorded in the history for two years without being a default. Once a default is listed, the Code gives it five years from the date of default, whether or not you pay later.

Consumer Protection also says lenders can use a debt collector, report the debt to credit reporters, repossess the security, pursue a guarantor and take you to court. A judgment debt goes on your credit record and can lead to an attachment order on your pay or benefit.

If you are still behind

The best time to act is before the listing. Consumer Protection’s guidance gives you these tools.

• Hardship. For an unexpected life event such as job loss, illness or relationship breakdown. You apply in writing, say what you want (more time, a payment holiday or both) and include proof. You must be less than two months behind. The lender must decide within 20 working days, must not charge to consider it and must suspend repossession action until it decides.
• A free financial mentor. They can negotiate with the lender, check fees and help with a budget. MoneyTalks is on 0800 345 123.
• Fees. Consumer Protection says default fees for missed payments must be $30 or less, and other fees must cover costs rather than make a profit. Ask for a breakdown.
• Voluntary return. If you hand the car back, you will still owe money, but Consumer Protection says the debt will not include penalty interest or repossession costs. Take advice first, because the shortfall is still yours. Our guide to struggling to pay your car loan covers this step by step.

If you think the lender mishandled the situation, you can complain to its dispute resolution scheme, which is free. Your credit contract names it.

Already defaulted: the three states

Where the old loan stands decides how a new lender reads it.

1. Settled. Paid in full, with the entry updated to show it. This is the strongest. See car finance with a paid default for how to check that.
2. On a plan. You have a written arrangement and a record of keeping to it. Lenders often accept this if the plan is steady and affordable alongside a new loan.
3. Open or in collection. The weakest. A new lender has to consider whether you can cope with an existing debt as well as a new one.

Put the paperwork in one folder: the contract, the arrears letters, any hardship application, the settlement or plan, and written confirmation of the balance.

What lenders want from you

• A short explanation. What went wrong, such as lost hours, illness or a breakdown, and what changed. Keep it to a few sentences and do not blame the previous lender.
• Where the old loan stands. Settled, on a plan, or in the process of being sorted, with evidence.
• Time and a clean run. Months of on-time payments on everything else.
• Income. Payslips, or three months of bank statements if it varies.
• A realistic ask. Under the CCCFA, the lender must check affordability. A smaller loan on a cheaper car is easier to place than one that repeats the earlier stretch.
• A deposit. It reduces the loan and shows commitment.

A worked example (illustrative only)

These are round, made-up numbers. They are not a quote.

You are four months behind at $300 a month, so you owe $1,200 in arrears. The lender agrees a plan: your normal $300 plus $200 extra for six months. That is $500 a month for six months, then back to $300. Over the same stretch you have to find $500 a month, not $300, so a new car loan would sit on top of that.

Suppose instead you clear the arrears first. Six months later you apply for a $5,000 loan over 36 months at an example 24.95%, which is roughly $199 a month. Your budget now carries the $199, not the $500 plus the new loan. Waiting until the old account is sorted can turn an unaffordable application into an affordable one. Check your own sums with the repayment calculator.

Stopping it happening twice

• Borrow less than the maximum offered.
• Keep a repair buffer in your weekly budget.
• Ask for the total cost of credit and any early repayment fee.
• Contact the lender at the first missed payment, not the third.
• Run a PPSR check on any used car.

Red flags

• A lender that treats your old default as irrelevant. It will see it.
• Pressure to sign the same day, or add-ons that were not explained.
• A new loan that rolls the old debt in without showing you how the sums work.
• Anyone offering to remove a default for a fee.

Cheaper options

• Good Shepherd Good Loans. No-interest, fee-free loans of up to $7,000 for a car, with income limits and other criteria.
• MoneyTalks for free budgeting help and for someone to speak to the lender for you.
• A cheap cash car or public transport while the old loan is sorted.

If the lender takes the car, and checking a car you want to buy

A lender can repossess only if the contract allows it, you are behind or in breach, and it has sent a warning notice at least 15 days before. After taking the car it must send a notice with your options: pay the overdue amount, pay the whole balance, or let it sell the car. The notice includes an estimated value, which is often well below what you owe.

You can arrange your own valuation and find a buyer, and the lender must sell to that buyer at no less than the estimated value. Within seven days of a sale it must tell you the sale price, the costs, the balance and any shortfall or surplus. It cannot add interest, penalties or collection costs after the sale.

If you are buying again after a default, search the vehicle on the Personal Property Securities Register before you pay. A registered security interest means the car could be taken from you for someone else’s debt.

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 consider applicants with a past car loan default. A hard check only happens later, if you choose a specific lender. If the right advice is to sort the old loan first, we will tell you. Start with the eligibility check or see how it works.

General information only, not financial advice.

Sources

• Consumer Protection: payment problems
• Consumer Protection: loan for your car
• Privacy Commissioner: Credit Reporting Privacy Code 2020
• Centrix: My Credit Report FAQs
• Good Shepherd NZ: Good Loans
• MoneyTalks
• Consumer Protection: Loan for your car
• PPSR: How the PPSR can help when you are buying used goods