Signs of a predatory lender, and the rule behind each

ASix things to check

Noticing one of these is a reason to check, not proof of wrongdoing.

1. It markets itself to bad credit or low income

   This is Moneysmart’s own warning: such lenders may charge high interest and fees, and borrowing from them might put a borrower in a worse position.

   The rule behind itA credit record does not lift the duty not to lend unsuitably. Credit licensees must not enter into a credit contract, suggest one, or help a consumer apply for one, if it is unsuitable for that consumer. Unsuitable credit explains the test.

2. It holds no credit licence

   Anyone engaging in credit activities will generally need an Australian credit licence, or an authorisation from a licensee, before starting business. For a broker, Moneysmart says to make sure they hold a licence to give credit advice or are a representative of a licensee.

   The rule behind itEngaging in credit activities while unlicensed is an offence under section 29 of the National Credit Act. Under section 113 of the Act, the credit guide of a licensee providing credit assistance must specify the licensee’s name, contact details and Australian credit licence number, and every licensee must be a member of the Australian Financial Complaints Authority. ASIC’s registers include a search of organisations banned or disqualified from credit activities.

3. It asks you to sign that a personal loan is for business

   Business credit sits largely outside consumer law: ASIC’s licensing guide says that when credit is provided wholly or predominantly for business or investment purposes, the National Credit Code does not apply, unless the investment is in residential property, and the Code’s own words for that investment are narrower: credit “to purchase, renovate or improve residential property for investment purposes”, or to refinance such credit . A declaration about purpose can therefore matter a great deal.

   The rule behind itA signed declaration does not settle the question. RG 209 says a borrower’s declaration that credit is for a purpose that is not a consumer purpose is ineffective if the lender knew or had reason to believe, or would have known after reasonable inquiries, that the credit was really to be used wholly or predominantly for a consumer purpose, and that the declaration is not irrefutable evidence of the loan’s purpose. Section 13 of the National Credit Code also makes it an offence for a person to engage in conduct that “induces a debtor to make a declaration under this section that is false or misleading in a material particular”, where the declaration is false or misleading, with a criminal penalty of 2 years imprisonment.

4. It charges for help that is free elsewhere

   Moneysmart says paying a credit repair company to clean up errors on a credit report is unnecessary; such firms may charge high fees for what you can do yourself for free, can sometimes cause harm such as a new default when their own fees go unpaid, and paying them may not improve a score. It also says financial counselling is free and you never need to pay, and that businesses charging fees for it are debt consolidation and refinancing companies, not financial counsellors.

   The rule behind itA debt management service, which gives debt management or credit reporting assistance for a fee, is a prescribed credit activity. Moneysmart’s advice is to check the company on ASIC’s Professional Registers Search and deal only with a licensed credit repair or debt management company, and it warns that companies advertising they can get anyone out of debt, however much is owed, may be making an unrealistic promise.

5. It raises a credit limit you did not ask for

   A higher limit is more credit, and the responsible lending prohibition reaches an unsuitable credit limit increase as it reaches an unsuitable new product.

   The rule behind itUnder the National Credit Code, the limit on a continuing credit contract can go up only if the debtor asks for it or gives written consent.

6. Its contract tries to take the law away

   Some terms try to do what the law does not allow. Under the National Credit Act, a provision of a contract by which a person seeks to avoid or modify the effect of the Act (other than the National Credit Code) is void.

   The rule behind itA credit provider or lessor who is party to such a void contract commits an offence, with a criminal penalty of 100 penalty units. Under the ASIC Act, an unfair term in a standard form consumer contract for a financial product or financial services is void, and the contract keeps binding the parties if it can work without that term.

BApplications that leave a trace

A lender or broker who presses for application after application is worth noticing for a plainer reason. Moneysmart says each application for credit is noted on your credit report, and too many in a short time can lower your credit score. ASIC’s guidance to mortgage brokers says that applying for loans just to find out what price lenders will offer may not be in the consumer’s best interests, because several applications can affect a credit history and make future credit harder to get or dearer.

CWhen a sign turns out to be real

A licensed business must try to resolve a complaint: Moneysmart says a licensed company or individual is obliged to see whether it can resolve the issue. Its complaint route starts with the business itself, in writing if a call or email does not fix it, and then the Australian Financial Complaints Authority, which helps resolve disputes with financial firms. The high-cost products these signs often attach to are set out in High-cost loans and their warnings, and the free services in Where to get free help.