There isn’t a day that goes by that I don’t get an email from someone in a dire situation because of bad financial advice. The lending industry was built to give people opportunity, yet more and more Australians are finding themselves in impossible circumstances because their loans are doing more harm than good.
Recently, I received a letter from a woman named Cathy who found herself in this category. Cathy was being charged $10,000 per month on top of her mortgage for being in default after receiving bad advice from a lender. Now she is facing having to sell three months into a six-month emergency loan, or face foreclosure.
Unfortunately this story isn’t uncommon. After the GFC, more Australians have to resort to short-term, emergency finance at very high rates, usually to retain their house or to keep a business alive. It makes people very vulnerable.
If you find yourself in this position, you must acquaint yourself with all the issues before taking the money, because there isn’t much you can do once you’ve signed.
For a start, all lending is made on the basis of risk and price. If you’re at high risk of defaulting, lenders charge high interest; low risk of default equals a lower interest rate. Generally speaking the lowest rates have the toughest criteria and they are sourced from the institutions you are aware of: the big banks, the regional banks, credit unions and building societies, as well as the independent financial institutions like Yellow Brick Road.
In the post-GFC world, lending criteria has tightened and the riskier style of loans – no-docs, low-docs and “asset-lends” – have largely dried up in mainstream lending.
This has pushed many Australians with patchy employment records and bad credit histories into borrowing from organisations they are unfamiliar with – organisations that might be reputable but that could also be “loan sharks”.
Having accepted that your personal situation means you’ll need to borrow from this high-risk, high-rate end of the market, but it doesn’t mean you have to put up with any terms the lender demands.
For instance, you should never enter a loan without having everything in writing, including all the fees, penalties and establishment charges spelled out.
You should be particularly careful about the penalty interest charges for late payment; it’s these penalties that make some loans extortionate.
You should also avoid lenders with a poor or non-existent reputation. The Australian Securities and Investments Commission (ASIC) has search engines on its website that alert you to complaints against a company or broker, or the site can reveal that there’s no mention of the organisation at all.
A lender with no reputation isn’t always predatory. But if you’ve never heard of them, have a look at their accreditations. If you’re going through a broker, are they a member of the MFAA – the Mortgage and Finance Association of Australia?
Do they subscribe to COSL, the Credit Ombudsmen Service Limited, or another external dispute resolution provider? If you are going direct to a lender, do they have an Australian Financial Services Licence?
Organisations will advertise accreditations on their stationery, so if you see AFSL or ACL on their business cards, they use standard loan agreements.
If the lender has none of these accreditations and seems to be outside the mainstream, I suggest you engage a solicitor to review the documents.
Perhaps the biggest problem of this kind of lending is the borrower himself.
When financial panic sets in and you face losing your house or business, it’s easy to focus so hard on getting the money that you forget it was an emergency facility.
If you have to take short-term money at high interest rates, have a plan for what happens when the term of the loan is up or the financial panic is over.
Does the debt get folded into bank debt? Is it discharged? Do you sell whatever you have financed? Do you settle with the lender?
I have sympathy for people who have to take these high-interest loans. But you can even the odds by looking out for yourself: if someone says “no credit history – no worries”, start worrying.
Do your homework, get advice and have a plan.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.