Chapter 6: Consumer credit

6.1 What is consumer credit?

Consumer credit products are loans repaid over time with additional interest and fees. Everyday credit products include credit cards, store cards, personal loans, car loans, home loans, overdrafts, instalment purchases and lease to buy arrangements.

Credit providers are also known as ‘lenders’ and can include banks, building societies, credit unions, finance companies and other businesses that offer to lend you money. You might obtain credit directly from the lender or through someone else (for example, a mortgage broker, a car dealer or department store).

Sometimes the lender will ask for ‘security’ for the credit, in case you can’t meet your repayments. Security could include your home, a car or other valuable property, but it can’t include essential household goods or tools of trade valued below a set threshold (‘prohibited securities’). If you don’t make your repayments (this is called ‘default’), the credit provider is entitled to repossess the item(s) you put up as security. If this doesn’t cover the full amount you owe, you may still need to pay the shortfall. Loans that do not require security are called ‘unsecured’.

There are laws and regulations in operation that specifically deal with consumer credit and consumer leases. Acting quickly and understanding the protections and options available to you may help you avoid a debt crisis.

6.2 Before you borrow

When borrowing money, you should always keep the following in mind:

Remember that borrowing money costs money — so only borrow if you need to.
Work out what you can afford to pay — be realistic, don’t over-commit.
Shop around for the best deal.
Make sure you understand the terms of the loan — lenders are required to give you this information (read it carefully).

Being a careful consumer will help you avoid unmanageable debt.

6.3 Consumer credit protections

Australia has a single national consumer credit regime governed by the National Consumer Credit Protection Act 2009 (Cth) (NCCP), which includes the National Credit Code (NCC) as Schedule 1 to the Act. The Australian Securities and Investments Commission (ASIC) is responsible for administering the NCCP. The NCCP and related regulations make up consumer protection law for credit in Australia (‘the credit law’). The credit law regulates the credit industry, encourages responsible lending and allows for flexibility when borrowers experience financial hardship.

As a consumer, this means that:

you must be provided with certain information when you enter a loan agreement
lenders must take specific steps before seizing property or commencing court action
lenders must be members of a free and independent external dispute resolution (EDR) scheme, namely, the Australian Financial Complaints Authority (AFCA)
you have a right to request all relevant documents
you can challenge unjust contracts and unsuitable loans
you have rights to seek variation, based on financial hardship.

The credit law applies when:

a borrower is a natural person
the credit is intended for personal use (at least 50%)
charges (fees and interest) are added to the amount borrowed
the lender is appropriately licenced, and provides credit in the course of business, and
the credit product is a home or investment property loan, personal loan, credit card, consumer lease, payday loan, reverse mortgage, vendor finance or a loan with no interest for the purchase of overpriced goods.

The credit law does not apply to some loan types, including low-cost, short-term credit (less than 62 days), insurance premiums paid by instalments, bill facilities and staff loans.

Licensing

The credit law regulates credit providers, who must be licensed with ASIC or appointed as a credit representative by another licensee. ASIC regulates debt collectors who take on assigned debts, but those that only act as ‘agents’ for lenders need not be licensed. Similarly, debt negotiation firms do not have to be licensed or be a member of the free EDR scheme, AFCA. The MoneySmart website allows you to check if a credit provider is appropriately licensed.

Disclosure obligations

The credit law requires credit providers to provide you with essential information about the credit provider (called a ‘credit guide’) and the terms of the loan. It’s crucial that you get these documents and that you read them carefully when entering a loan agreement. Failure to make the necessary disclosure may entitle a consumer to compensation.

Responsible lending

The credit law also prescribes responsible lending practices, which means that lenders should not enter unsuitable loan arrangements in the first place. To assess the suitability of a loan, credit providers must make reasonable enquiries and take reasonable steps to verify applicant information. As a rule, a loan is unsuitable if the customer cannot afford the loan repayments, and the loan does not meet their objectives and requirements. Borrowers can apply for remedies, including changes to the contract and compensation if suitability requirements aren’t met.

Unjust and unconscionable contracts and transactions

If a contract is unjust (for example, the lender pressured you into signing), it can be re-opened, and the obligations varied. AFCA can consider disputes about unjust credit contracts. You can also dispute a change of interest rate, establishment fees and early termination or exit fees if they are unconscionable (harsh or oppressive).

6.4 General enforcement procedures

The credit law provides some strict guidelines about enforcement of consumer credit debts.

Default

Lenders must take specific steps before they can commence legal action against you. Where you default on a payment, you will receive a ‘default notice’, which contains information about the amount owed, your right to apply for a hardship variation, and information about external dispute resolution.

You then have an additional 30 days to pay the amount in the default notice and the regular repayment. If you fail to comply or take appropriate action, the creditor may:

make the whole loan repayable
commence court action to recover the debt, and
repossess secured property (if the loan is secured).

If you receive a default notice, you should pay it immediately (if you can). If you are experiencing financial hardship, you have a right to seek a variation of the loan terms. Variation might involve a temporary stay in repayments (if you’ve lost your job and need time to find a new one), or reduced repayment amounts (if you can’t manage the repayments previously agreed to).

Financial hardship provisions

There are two main reasons why people experience financial hardship:

they borrowed more than they could realistically afford, or
their circumstances have changed so they can no longer meet repayments, due to loss of employment, illness, family breakdown, unforeseen carer responsibilities, business failure, funeral expenses and so on.

The credit law includes special ‘financial hardship’ provisions, for people unable to meet their repayment commitments. So, if you’re having severe difficulty making repayments, you can take the following steps:

tell your credit provider you’re having trouble with repayments and try to offer a solution that will work for you — for example, an extension of time to pay or reducing repayment amounts
within 21 days of receiving a default notice, the credit provider can ask for further information (and then you have a further 21 days to provide this)
credit providers need to provide a response within a set time frame (either accepting your application or refusing it with reasons)
if you’re unhappy with their decision, you can apply to the Australian Financial Complaints Authority (AFCA) for independent review
AFCA can make repayment arrangements on the grounds of financial hardship
credit providers cannot commence legal action against you until at least 14 days after giving you notice of their refusal of your application, and they cannot act when an AFCA determination is pending.

When requesting hardship variation, you should be realistic about what you can afford to pay and when you can afford to pay it. See the sample letter to a credit provider regarding financial hardship in Chapter 17.

Case study

Jenny is a single mother who owns a small apartment, which she’s paying off with a bank mortgage. Jenny has recently had to take unpaid leave from work to provide care and assistance to her mother, who was diagnosed with cancer. Jenny fell behind in paying her mortgage and received a mortgage default notice from her bank. Jenny contacted the financial hardship division of her bank and discussed her circumstances. Given that Jenny’s mother appears to be getting better, and that Jenny will be able to resume full-time work in the next few weeks, the bank agreed to defer Jenny’s mortgage payments for a few months to allow Jenny the opportunity to catch-up on repayments.

Repossession of secured vehicles and goods

The credit law prescribes the processes for repossession and sale of secured property by creditors. Failure to comply with these procedures may entitle a debtor to item return and compensation. The general process is as follows:

Failure to comply with a ‘default notice’.
Repossession of secured property.
Further written notice, given within 14 days of repossession, which gives the debtor the option of either paying the arrears and enforcement expenses or the full loan amount, to get the goods back, after which:

the debtor has 21 days to respond to the notice
if the debtor is unable to pay, the goods can be sold, and then
after the sale, the debtor gets a further notice about the amount released from the sale and any shortfall (which still has to be paid).

This process does not apply to repossession for default on home mortgage repayments. In these cases, banks will commence court action to repossess the mortgaged property.

6.5 Disputes

Internal dispute resolution (IDR) services offered by your credit provider should help you resolve most complaints. If internal complaints don’t work, you can seek an independent review by AFCA. If you agree to AFCA’s determination, the service provider will be bound by it. Generally, credit providers must cease any enforcement action until after AFCA has investigated the matter. The Local Court can hear credit disputes; however, this option may involve unnecessary cost, complexity and delay, so AFCA is the recommended option.

Internal dispute resolution (IDR)

Credit providers usually have internal complaints departments that accept complaints by phone, email or letter. You must try to resolve disputes directly with the service provider before you can make an application for external dispute resolution. In most cases, the service provider has up to 45 days to respond to a complaint. If your dispute involves difficulty you are experiencing in meeting repayments due to financial hardship, then the credit provider has 21 days to respond.

You should contact your financial service provider directly for further information about their internal dispute resolution processes.

If you are not satisfied with the outcome of internal dispute resolution, then you can apply to AFCA for an independent determination.

External dispute resolution (EDR)

Australian Financial Complaints Authority (AFCA)

Under the credit law, all Australian financial services licensees, Australian credit licensees and authorised credit representatives must be members of the single ASIC-approved external dispute resolution body. The Australian Financial Complaints Authority (AFCA) is a non-government, not-for-profit organisation which provides an external review of decisions by finance and credit providers, insurers and superannuation funds.

Review by AFCA is free, independent and easy to access, and is the preferred option for a debtor who has a dispute with a credit provider. It will also stop the creditor from repossessing property or commencing court action against you while AFCA considers the dispute. If you choose to complain to AFCA, you do not lose your rights to go to court if you are unhappy with their determination. If a credit provider is threatening court action, and you are suffering financial stress, it might be sensible to pre-empt this with an application to AFCA instead. If you agree with the determination made by AFCA, the service provider is bound to comply. Even if your credit provider has commenced a court action against you, you can still lodge an AFCA application any time before they obtain ‘judgment’ against you. An AFCA application will stall court action until AFCA has decided. AFCA can make decisions about financial hardship, and has streamlined procedures in place for managing these claims.

Australian Securities and Investments Commission (ASIC)

If AFCA is unable to help, or your concern is more general, you can also complain to ASIC. ASIC has a role in maintaining industry standards, and they value feedback from customers. ASIC cannot settle credit disputes or award compensation. However, if there is evidence that a credit provider has acted illegally, they may be able to take further action. See the ASIC website for further information about lodging a complaint.

6.6 Payday and small loans

A payday loan is a small, short-term unsecured loan, referred to as a small amount credit contract (SACC). The amount borrowed must be less than $2000, with a repayment term of up to 12 months. Loans of less than 15 days are banned. The cost of credit on a SACC is capped, which means that credit providers can only charge the following:

20% establishment fee (calculated on the amount borrowed)
fees of 4% per month (charged on the amount borrowed)
government fees (if applicable)
default fees and enforcement costs.

The maximum amount payable on the loan cannot exceed twice the amount borrowed.

SACCs are subject to additional ‘responsible lending’ requirements. For example, the total repayments of a payday loan cannot exceed 20% of the Centrelink income of a customer (where Centrelink payments account for at least 50% of their earnings). Also, payday lenders are required to warn/inform potential clients that small loans can be expensive and that alternative options may be available.

Another way of obtaining small, short unsecured loans is the ‘instant cash loan machine’. These machines, which look like ATMs, lend people up to $1000 and require only identification and bank details. Customers typically are required to pay back the loan, plus interest, within one to three months.

The ASIC website has a payday lending calculator that can help you check if fees are appropriate.

If you think a lender has breached the requirements outlined above, you can make an internal complaint to the lender or an external complaint to AFCA/ASIC.

6.7 Medium loans

The credit law also provides special provisions for medium amount credit contracts (MACCs), which are loans between $2000 and $5000, with terms between 15 days and 24 months. Charges (including interest) are capped at 20% of the establishment fee, and interest cannot exceed 48% per annum. Lenders can take security for these loans (including mortgages over goods, cars and residential property), but not ‘prohibited’ security such as essential household items.

6.8 Small loan options for low-income earners

If you’re a low-income earner, and you need money for essential items, then you should consider low or no-fee loan options that may be available to you. Talking to a financial counsellor may help you determine your eligibility for these loans.

For example, the No-Interest Loans Scheme (NILS) is available in many community organisations in Australia. NILS loans are small, interest-free loans for low-income earners, which can be used for essential household items or medical needs. To be eligible, you must have a Centrelink, health care or pension card (or qualify for one) and show that you can repay the loan in 12–18 months.

If you’re eligible for Centrelink payments, you may be able to get an advance payment from Centrelink (for example if you need to buy a new fridge), which you pay back over six months.

6.9 Pawnbrokers

A pawnbroker is an individual or business that offers secured loans to people, with items of personal property used as collateral. Pawnshops typically accept jewellery, musical instruments, audio equipment, computers, video game systems, televisions, cameras, power tools and other relatively valuable items as collateral. It’s like selling your goods, but you retain the option to get your pledged item back after you’ve paid off your loan. Interest on the loan depends on the amount borrowed. The broker will return your property after you’ve satisfied the terms of the loan agreement.

Pawnbroking is regulated by state-based pawnbroking legislation and by the unconscionable conduct and misleading and deceptive provisions of the Australian Securities and Investments Commission Act 2001 (Cth). You should be very careful when entering into these arrangements — especially if you value the property you’re pawning.

6.10 Consumer leases and ‘rent to buy’

Consumer leases refer to situations where you hire or buy an item over a period, and make regular repayments on the rental or purchase price. With a consumer lease, you hire the item for an agreed period but do not automatically own the item at the end of the period. With rent to buy, you commit to purchase the item at the end of the rental period by paying an extra amount of money to finalise the purchase. Be careful that you understand the difference between these two types of arrangements, and that you understand the terms of your contract. Additional fees/penalties will apply if you miss payments, and you may also end up paying much more than the item is worth.

6.11 Mortgage stress

Buying a home is often the biggest and most important investment people make in their lifetime, and for most of us, this involves taking out a mortgage. Falling behind in mortgage repayments can be incredibly stressful because it puts you at risk of losing your home. You should always deal with your most important debts first, and mortgages are usually right at the top of that list. If you’re struggling with mortgage payments, you should act quickly. Banks don’t need to take court action against you to repossess your home, but they usually do (so they have access to court-based enforcement options). Where you default on a mortgage repayment, banks will usually take the following steps:

Issue a default notice — allowing you 30 days to pay arrears and the amount due.
Issue a summons or statement of claim for repossession of your home (or seeking immediate payment in full).
Obtain a judgment against you — confirming that the total amount owed is due immediately.
Get an order that you vacate your property.

If your lender has taken any of the above steps, it is vital that you take immediate action and seek legal advice. You may be able to vary the terms of the loan based on financial hardship. Variation may include increasing the time for repayment, reduced repayment amounts, or a temporary stay on repayments. See 6.4 General enforcement procedures (above) for further information about financial hardship provisions available to consumers. If your credit provider doesn’t agree to alter your loan, you can still make an application to AFCA any time before judgment.

If you are experiencing mortgage stress, and are at risk of losing your home, you may also consider making an application to access your superannuation, based on financial hardship.

6.12 Credit reporting

Credit providers (including banks and building societies), courts, utility companies and telecommunication carriers provide information about credit activities and payment defaults to central databases managed by credit reporting bodies (CRBs). CRBs are then able to include that information on an individual's credit report. A credit provider or utility company can check credit reports when deciding whether to offer products or services to customers.

The following information usually appears on your credit report:

your details
repayment history (current loans, due dates for payments, whether you made payments by the due date, dates of missed payments)
your credit history — including loans you’ve applied for, defaults over 60 days, where collection activity was taken and any credit infringement
other information — bankruptcies (for up to 7 years after they occurred), court judgments, debt agreements and personal insolvency agreements (for up to 5 years after they occurred).

It’s important to remember that CRBs record payment defaults on your credit report and that future lenders will consider this history when assessing loan applications. It’s a good idea to check your credit report regularly (you can request a copy directly from one of the CRBs listed in the Contacts). Your credit report will alert you to incorrect entries or issues such as identity fraud. If you disagree with entries on your credit report, you can complain directly to the relevant credit provider. If they don’t act to rectify the issue, you can go to AFCA or complain to the Office of the Australian Information Commissioner (OAIC).

6.13 Debt collection and credit law

Debt collectors are subject to the credit law if they own the debts they collect (as distinct from those that act as agents). Agents do not need to be licensed or authorised. However, all debt collection activity concerning credit remains subject to the Australian Securities and Investment Commission Act 2001 (Cth) (including the prohibition against undue harassment or coercion), so complaints can be made to the principal loan provider and after that AFCA or the Office of the Australian Information Commissioner (OAIC).

6.14 Joint debtors and guarantors

Joint debtors

You become a co-borrower if you sign a loan with someone else. Co-borrowers are jointly and individually liable for the entire debt. If your co-borrower is unable to pay their share of the loan, you will become responsible for repaying the full amount outstanding. This liability continues even if your co-borrower files for bankruptcy or enters a debt agreement or personal insolvency agreement to deal with their unmanageable debt (see Chapter 16 for further information about bankruptcy and debt agreements).

Guarantors

If a credit provider is concerned about a borrower’s ability to pay off a loan, they may ask for a guarantor. If you sign a guarantee agreement for a friend or family member, you are known as the ‘guarantor’ of the loan. Guarantors are legally responsible for paying back the entire loan if the principal borrower cannot (or will not) make the repayments. You will also have to pay any fees, charges and interest added to the principal.

As a guarantor, you don’t have the right to own the property or items bought with the loan, but you bear the burden upon default. You should never let a family member pressure or force you into signing a guarantor agreement. If you are thinking of becoming a guarantor, you should read all documentation carefully, and consider getting legal advice.

Enforcement of a guarantee

The credit law provides some protections for guarantors. For example, the lender cannot enforce a guarantee until:

the lender issues a default notice to the guarantor
the default notice remains unpaid, and
the credit provider has obtained a judgment against the borrower, and that judgment remains unpaid for 30 days.

In certain circumstances, co-borrowers may (in reality) be guarantors. For example, where they received no benefit from the loan and the lender knew, or should have known, this was the case. In these situations, any joint borrowing agreement may not comply with legal requirements and may not be enforceable. You should get legal advice if you think this situation applies to you.

Challenging a claim

Sometimes guarantors have the right to challenge the agreement they’ve entered. You should get advice immediately if you:

were pressured into signing
suffered from a disability or mental illness at the time of signing
did not receive legal advice before signing and did not understand the documents or the extent of the risk you were taking on, or
believe the credit provider or broker used unfair tactics, tricked or misled you.

Get legal advice if you think any of these situations apply to you.

Relationship breakdown

Relationship breakdown can affect every part of your life, including your finances. If you were a guarantor or co-borrower for your ex-partner, you could still be liable for their debts if they can’t or won’t repay their loan.

In most cases, you won’t be able to get out of loan contracts you made in the past, but you should get legal advice about where you stand. In some cases, you may be able to take family law action to remedy these issues.

Legislation

Fifth Chapter

Government debt

Seventh Chapter

Consumer goods and services