One of the consequences of the GFC and the tightening of credit criteria among lenders has been the number of Australians having to borrow money from short-term, high interest rate lenders – once known as loan sharks.
Take the email I received this week from a woman named Cathy. 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. The situation is crippling. There are times when people need short term financing, usually to keep their house or stop a business going under.
But there are things Australians can do to ensure that just because the situation is desperate, people are not preyed upon. Firstly, I would suggest that any loan should have all its interest rates, penalty fees and establishment charges spelled out in writing. It’s also worth doing basic research on a lender: use the Internet, go to the ASIC website and do a search, see if there’s any mention of this organisation.
If there are complaints or notices against them, be on your guard. Also look out for accreditation: the Mortgage & Finance Association of Australia (MFAA) means they’re an accredited broker operating with a code. If they have an Australian Financial Services License (AFSL) they are licensed to distribute financial products and if the letters ‘COSL’ are on their stationery, they are part of an external dispute resolution process. As of April 1, a lender with an Australian Credit License is bound by the rules of responsible lending, meaning that the lender must make sufficient enquiry to ensure that the borrower can afford the payments before they issue the loan.
I’m not saying that any lender outside the banks is suspect – organisations such as Mortgage House or Yellow Brick Road are accredited and put great store in their integrity and reputation. But if the lender you’re talking to has none of these affiliations, you should have a solicitor review your loan documents before you sign.
Yet, regulation and licensing cannot save people from themselves. And one of the worst things you can do with short-term borrowing is to have no plan. If you borrow money for six months or a year, at very high rates, what’s your strategy for when the loan ends? Can you pay it out? Do you roll it into something with lower rates? Or can you pay the high interest rates forever? I didn’t think so.
So if you have to take short-term finance, at least rebalance things slightly in your favour: If someone says, ‘no credit history – no worries,’ then start worrying. Take some control: Do your homework, take advice and have a plan. Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance.