Settlement Guide

Australia's lending laws may be relaxed, but here's why it's important to borrow responsibly

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The Federal Government is proposing changes to lending laws that will make it easier for consumers and businesses to access credit. But experts warn it is more important than ever to borrow responsibly.

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.

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.

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.

Woman going through bills, looking worried
Consider the potential for interest rate rises when calculating how much you can realistically borrow.
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“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.”

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.

Close up of signing a mortgage contract in the office.
Under the proposed changes creditors who borrow money irresponsibly will no longer face civil and criminal penalties.
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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.  

Distressed senior woman with bills
If English is not your first language, financial counsellors at the National Debt Helpline can use free interpreting services
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For free and confidential financial counselling, ring the National Debt Helpline on 1800 007 007.

Free and confidential, the National Elder Abuse phone line is on 1800ELDERHelp, 1800 353 374. 

Confidential counselling and support services for victims of domestic violence is on 1800RESPECT, 1800 737 732

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