Lenders Of Last Resort
Sydney Morning Herald
Tuesday August 19, 1997
EASY credit has almost become a hallmark of Australian society but it has its drawbacks. That the rate of bankruptcy for the under-35s has increased by more than 240 per cent in 10 years - according to Trevor Gibson, the author of Mastering Your Money - is a telling statistic.
In fact, refinancing to consolidate existing loans is the second most popular reason for taking out a personal loan, says Haydn Park, spokesman for the National Australia Bank.
There is no doubt that refinancing or consolidating loans can be a good option, especially with credit card interest rates running much higher than personal loan rates.
But what do you do if the bank knocks back your loan application? While some people take this as a warning sign and make an effort to get their finances under control, others look to "lenders of last resort" who may not have such strict lending criteria. Those more desperate still may turn to
pawnbrokers.
While you may think you can't afford not to get a loan, you should ask the question: can you afford a loan with a lender of last resort? According to a recent report by Legal Aid NSW and the Consumers' Federation of Aust-ralia, some, such as Avco Financial Services, have provided personal loans with interest rates as much as double the banks' rates.
The report, titled In Whose Interest? Avco Lending Practices Exposed, indicates that some lenders of last resort lend on the basis of the assets you own rather than on your ability to repay. This is called asset-based lending and it is of concern to consumer groups.
"The provision of credit . . . to
people who have already been refused credit can cause great hardship to consumers . . . This hardship is increased where the loan is secured by the consumer's car or home," the report says.
But Louis Hawke, Avco managing director, rejects the findings of this report. He says Avco's lending criteria are "absolutely cashflow-based".
"We do a needs analysis and walk through the sources of income and the outgoings and then work out how much free cash they have left and what they can afford to pay," he says. "We reject about one-third of our applicants."
While he concedes some Avco loans are at 29.5 per cent, he says fewer than 1 per cent are near the 29 per cent mark.
The smaller the loan, the higher the interest rate, he says. "If you were to borrow $500, you would pay 29 per cent." This is because of the costs to Avco of setting up a small loan. "But if you were to borrow $10,000, the interest cost is about 16-17 per cent, which is around the credit card range."
But if a bank knocks you back for a loan, that does not have to be the end of it. If you have been refused because of an inability to pay off a loan, some banks will help you sort out your situation so that you will be able to get a loan down the track.
"If the customer does not fit our lending criteria up-front, we work with that customer to ensure that they will be able to meet our criteria within a year or even six months of proper financial planning," says Megan Donald, spokeswoman for Westpac.
But the bottom line is that banks lend on the basis of your ability to repay. If the bank does not think you can afford the loan, perhaps you can't.
Interestingly, it is not always the case that people who get into trouble with finance-company loans have been knocked back by a bank first. Michael Funston, of the Consumer Credit Legal Centre, says he sees people who have taken up the finance arranged through various retail outlets offering a six- or 12-month interest-free term.
"There are problems associated with getting this type of finance," Funston says. "People are attracted to it by an interest-free period and it is certainly the case that, if you pay out the loan in that time, it is a good deal. But anec-dotal evidence shows this is not what happens. Typically, people don't pay out the loan."
He says that, if they did, the finance companies wouldn't offer them.
Louis Hawke says that Avco is paid a commission by the retailer to offer such loans.
Funston says another problem with this type of finance is that people think they are applying for a loan for the amount of the goods they are buying, but what they end up with is a revolving credit facility that enables them to keep borrowing.
"A lot of people fall into the trap of using these without realising the interest rates are absurdly high," says Funston. "Typically, the interest rates of facilities that people get through retail outlets by providers . . . are over 25 per cent. They can get locked into very expensive credit."
If things get out of hand, you can always turn to credit or financial counsellors. Ben Slade, of Legal Aid NSW, says that, if you believe you need a high-interest loan from a lender of last resort, what you really need is a financial counsellor. You also need a financial counsellor if you are being harassed or sued by a credit provider.
If the bank won't give you a loan and you still decide to look elsewhere, there are some crucial points to bear in mind. "Always know exactly what you are buying and be aware that money is very expensive," says Slade. "The interest rate is the measure of the price of money, not the size of the monthly repayment."
This is a distinction few people make.
The introduction in November last year of the Consumer Credit Code should go a long way towards making the choice of credit easier, according to the Department of Fair Trading.
"Statistics show we have become a nation highly dependent on credit in our day-to-day lives," says the Minister for Fair Trading, Faye Lo Po'. "Consumer credit is . . . seemingly addictive to consumers. People need the right tools to use it properly and protection when things go wrong."
The ministry has released a brochure which explains what borrowers should be aware of before taking out credit. "Before entering into a contract, credit providers must give you details about fees and charges in a pre-contractual statement," it says.
They must also give you "an information statement which outlines your rights and obligations".
The brochure contains a checklist of what pre-contractual statements should include and what you should get after the contract is signed.
Slade advises borrowers against buying the consumer credit insurance which finance companies sometimes offer. "Always refuse it," he says. "You don't have to have it and they can't make you have it."
They can, however, make you insure the goods they hold a mortgage over. "But you don't have to have their mortgage property insurance. Arrange it yourself."
A tip to avoid trouble: "Never ever go guarantor and never ever agree to be a co-borrower. If you are wealthy enough to loan the money yourself, there is no need to go guarantor. If you are not wealthy enough to loan it yourself, you shouldn't go guarantor."
Another way to avoid trouble is to tell your lender immediately if you have a change in circumstances "rather than waiting for the account to go in arrears", says NAB's Park.
But most of all, says Slade, if a bank knocks you back "think twice about whether your really need a loan".
Revolving credit facility
An ongoing loan that can be used for new purchases once the old ones are
paid off.
A borrower's checklist
* What is the interest rate?
* If the loan is secured, are you offered a reduced interest rate?
* How does the interest rate compare with other interest rates around?
* Is the loan based on your ability to pay or on the value of your goods and home?
* What happens if you can't pay the loan?
* Is the financier a member of an alternative dispute-resolution scheme?
* Understand that you are not obliged to buy consumer credit insurance.
* If refinancing, compare the interest rates of the original loan with the refinancing loan.
© 1997 Sydney Morning Herald
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