Key Points
- The Federal Government's proposal aims to make it easier for consumers and businesses to access credit.
- The proposal will shift the onus of assessing a borrower's suitability for a loan from the creditor to the borrower.
- Creditors will no longer face civil and criminal penalties for irresponsible lending.
In the wake of COVID-19, the Federal Government has put forward a bill to reform responsible lending laws, making it easier for consumers and businesses to access credit.
If the proposal becomes a law, the loan application process for borrowers will be simplified and the lenders’ requirement to assess and verify a borrower’s ability to repay a loan will be relaxed.
Roland Bleyer is the founder of Australia’s leading independent financial comparison site specialising in personal loans, Creditworld.
He says with the lenders’ responsibility to assess and verify a borrower’s ability to repay debt relaxed, it’s important that people borrow responsibly.
Tips for borrowing responsibly
Mr Bleyer outlines some tips on how to become a more responsible borrower:
- Take an in-depth look at your finances
- Be conservative in your decision
- Compare the options to get the best deal
- Consider the potential for rate rises
- Practice living on the amount you are left with once you need to meet your repayment schedule
The founder of Golden Eggs Mortgage Brokers and winner of the Finance Broker of the Year for New South Wales and the ACT in 2019, Max Phelps, specialises in the psychology of money.
He says that getting the shortest loan term you can afford can give you some breathing space if your interest rates go up and you need more time to pay off the loan.
“Make sure that you are borrowing an amount based on today’s interest rates that you could pay off in around 20 years or less, but that means that if the interest rates were to go up, let’s say four or five per cent that you could still pay that off in 30 years’ time frame.”
Consider the potential for interest rate rises when calculating how much you can realistically borrow. Source: Getty Images/urbazon
He advises looking at a number of factors, including future and present income, expenses and expectations, when calculating how much you can realistically borrow.
If you manage to live very, very cheaply because you are living at home with family or something else, then expecting that to continue is also unrealistic.
Roland Bleyer says that the proposed changes also mean that creditors will no longer face civil and criminal penalties for irresponsible lending.
Banks or brokers
Max Phelps points out that because of another legislation that came into effect on 1 January 2021, brokers are a safer bet for borrowers as The Best Interest Duty obliges them to prioritise consumers' interest.
The broker is required by a law to act in your best interest, the bank is only required to act in the bank’s best interest.
Under the proposed changes creditors who borrow money irresponsibly will no longer face civil and criminal penalties. Source: Getty Images/skynesher
Roland Bleyer says that simplifying the loan application process for borrowers and removing critical protections could also expose potentially vulnerable people to financial exploitation.
With the watering down of lending practices, we are going to see vulnerable people more exposed.
The current lending obligations and procedures under the National Consumer Credit Protection Act often identify red flags about domestic and family abuse.
But Mr Bleyer says relaxing the responsible lending laws could mean victims of family or elder abuse could be left with unwanted debts by perpetrators.
We always need to protect the most vulnerable people in society. Anything that reduces that protection is a step in the wrong direction.
The debate in the parliament on the Bill to change responsible lending laws was put off until May 2021. 
If English is not your first language, financial counsellors at the National Debt Helpline can use free interpreting services Source: Getty Images/redhumv
For free and confidential financial counselling, ring the National Debt Helpline on 1800 007 007.
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