Responsible lending laws should mean that, as a borrower, you’re protected from loans your financial institution knows you can’t afford to repay.
The law in Australia says the onus is on the lender to ensure the credit contracts (loans) they issue are ‘not unsuitable’ for the consumer. This means by the time they’ve approved your loan application, they’ve made the effort to determine whether you can repay the loan without experiencing substantial hardship.
If you do happen to find yourself in an unsuitable loan contract, a responsible lender shouldn’t keep you locked to that contract, or advise you to increase your credit limit.
What responsible lending looks like
To make sure they don’t grant you a loan that will cause you hardship in the long run, responsible lenders need to assess your:
- existing debts
- living situation
- employment situation
- fixed and variable expenses
- the number of people financially dependent on you
- any foreseeable changes to your financial situation
- any other details that may affect your ability to repay the loan
Lenders must also request appropriate documents that verify your income — most tend to ask for recent payslips, PAYG documents, tax assessments or evidence of business activity. Rest assured those long-winded loan application forms aren’t a complete waste of time. At least not as far as the responsible lending laws are concerned.
Behind the scenes, responsible lenders carefully consider the details of your financial situation to assess factors such as:
- what assets you can use to secure your loan
- whether your income sources are reliable over the loan term
- other existing debts that may affect your ability to make repayments
- the amount of disposable income that serves as a safety buffer if market conditions change.
If you’ve never submitted a loan application before, it’s easy to feel daunted by the long line of questioning. But this process isn’t about “weeding out” hard-working borrowers, or making value judgements about an individual. Rather, it’s a critical step in avoiding a predatory situation that places you in financial risk if the market turns.