05 Dec What regulation does interest free finance avoid?
Interest free finance. Some love it, some hate it.
As a solar retailer, many of you have considered selling a standard personal loan product but found that the process is just too hard. Compared to interest free finance anyway.
The real reason interest free finance is so easy is because the product is unregulated. Standard personal loans on the other hand are regulated. As a result, they come with more red tape.
Keep in mind everything we are discussing is for personal use. The below has nothing to do with business use loans.
So what is the regulation that doesn’t apply to interest free loans?
After the global financial crisis safeguards were put in place to protect consumers from financial institutions. In came in the National Consumer Credit Protection Act (NCCP).
Now we’re obviously not going to go through the whole legislation but I will show you one paragraph.
Division 4 requires a licensee, before providing credit assistance to a consumer in relation to a credit contract, to make a preliminary assessment as to whether the contract will be unsuitable for the consumer. To do this, the licensee must make inquiries and verifications about the consumer’s requirements, objectives and financial situation. The licensee must give the consumer a copy of the assessment if requested.
In layman terms, financial institutions regulated by NCCP must ensure that the finance contract is not “unsuitable” for the customer.
To do so they must inquire and verify income, expenses, objectives etc. This means collecting payslips, bank statements, performing credit checks, among other tasks.
Interest free finance on the other hand, rarely requires any of the above.
So does that make it unethical?
Unfortunately, I don’t have a clear cut answer for you here. It’s purely your personal opinion.
In terms of price, (as much as everyone likes to disagree) most of the interest free offers in the market are similar to personal loans. So no wrong doing there.
In terms of being a product that is against the spirit of what NCCP is trying to achieve? Maybe.
There will be a bucket of customers that will not get approved by regular personal loan providers because the they are not getting paid enough.
These people can potentially get approved through interest free finance providers because their income will never be checked.
Now should we be offering these people finance? Wasn’t stopping people like this from getting finance the whole reason NCCP was introduced?
An important note to add here is that the companies who provide these loans remain profitable. And more of these companies are forming. From this we can assume that default rates must be low.
So the interest free finance product lends to those people who were meant to be protected by NCCP. In saying that, as a group these same people still seem to be paying back the money anyway.
So you tell me. What do you think?