National Consumer Credit Protection Act 2009

Consumer credit laws – do you know your rights when borrowing money?

Most Australians borrow money at some point in their lives. In fact, the Australian Bureau of Statistics reports that ‘three in four (75%) households had debt in 2019–20,’ based on its Household Income and Wealth survey. This includes mortgages, personal loans, credit cards and even Buy Now, Pay Later services. 

But while borrowing money is part of everyday life, many Australians don’t really understand their legal protections and rights when doing so. 

Understanding your rights under Australia’s consumer credit laws can help you make more informed financial decisions and recognise when a lender may not have met their legal obligations. Here’s what you need to know about your rights when borrowing money. 

The applicable law – The National Consumer Credit Protection Act

The National Consumer Credit Protection Act 2009 (the Credit Act) provides consumer protection law for borrowers in Australia. It governs the people who provide credit – whether banks or non-bank lenders – as well as contracts and transactions. It aims to ensure responsible lending and is regulated by the Australian Securities & Investment Commission (ASIC). The operation of the Credit Act is directed by the National Consumer Credit Protection Regulations 2010.

The Credit Act applies to everyday banking products such as car loans, personal loans, home loans, credit cards and consumer leases. It provides important consumer safeguards, such as the licensing of lenders, and laws to ensure credit is suitable, and contains the National Credit Code, which regulates credit lending conduct.

But what does all this mean for you, as a borrower?

All lenders need to be licensed

The first protection is that under the Credit Act, those who engage in ‘credit activity’ require a licence or authorisation from a licensee. Credit activity just means any activity that relates to credit contracts, consumer leases, mortgages and guarantees. For borrowers, this means things like providing home loans, arranging credit cards or acting as a mortgage broker. It can also include people or businesses who help people apply for loans.

An Australian Credit Licence comes with strict conditions. For example, the license holder must belong to an external dispute resolution scheme so consumers have somewhere independent to turn if something goes wrong. They must also comply with Australia’s responsible lending laws, which help protect borrowers from unsuitable loans and unfair lending practices.

All lenders must comply with responsible lending requirements

The Credit Act also places important obligations on lenders to lend responsibly. Before approving a loan or increasing a credit limit, lenders are expected to gather information about the borrower’s financial situation and take reasonable steps to verify it. The goal is to make sure the credit product is actually suitable for the consumer and won’t place them into unreasonable financial hardship.

Unsuitability test

Chapter 3 of the Credit Act applies and sets out a test to determine whether or not a credit product is suitable for a particular lender. It’s unsuitable if:

• the consumer will be unable to comply with their financial obligations;
• the consumer will only be able to comply with their financial obligations with substantial hardship;
• the product will not meet the consumer’s requirements or objectives.

All lenders must follow the National Credit Code

The National Credit Code (the Credit Code) is part of the Credit Act and covers almost all credit contracts. It gives us many of the rules that lenders have to follow when providing any form of credit in Australia, including home loans, personal loans and credit cards. 

Generally speaking, the Credit Code applies when:

• the debtor is a natural person or strata corporation;
• the credit is provided wholly or predominantly for personal, domestic or household purposes, or to buy, renovate or improve residential investment property, or to refinance credit provided for this;
• a charge is made for providing credit;
• the credit is provided in the course of a business.
• The Credit Code does not apply to loans including low-cost, short-term credit (less than 62 days), pawnbroker loans, margin loans, bill facilities, insurance premiums paid by instalments and staff loans.

The Credit Code sets out important information that lenders must include in a credit contract. Under section 17, this includes things like the amount of the loan, the name of the credit provider and the amount payable, the interest rate and how it is calculated, the amount, frequency and total number of repayments and the details of action to be taken if the borrower is in default, among other requirements.

As a borrower, you’re also entitled to statements of the account. Under Section 33, a credit provider must provide a borrower with periodic statements of account. Generally, the maximum period for most statements of account is 40 days. A statement must contain the dates on which the statement period begins and ends, and the opening and closing balances. 

There are some exceptions. For example, lenders may not need to provide periodic account statements where the loan has a fixed interest rate for the entire term of the contract.

Special rules for payday loans

For small, short-term loans (often called small amount credit contracts or ‘payday loans’), the National Credit Code sets special rules to protect borrowers.
These rules apply to loans up to a set dollar limit, taken out for at least a couple of weeks and up to about a year, when the lender is a non-bank, and the loan is unsecured.

Instead of ordinary interest, these loans are subject to strict caps on the fees and charges a lender can add.
Because these caps have been changed and updated over time, it is best to check the latest limits on ASIC’s website or in the current version of the National Credit Code rather than relying on fixed percentages in this guide.

Lenders offering these loans also have extra obligations. Before giving you another small loan, they must look at whether you are behind on an existing small loan, or have taken out multiple similar loans in a short period. And they must not provide very short-term loans that have to be fully repaid within a few days.

There are also limits on how much a lender can recover if you default, so that the total amount you pay back cannot grow without limit compared with what you originally borrowed.

Special rules for comparison rates in advertisements

When lenders advertise fixed-term loans, such as home loans or car loans, they usually have to display a ‘comparison rate’ alongside the interest rate. A ‘comparison rate’ combines the interest rate with most standard fees and charges. It’s designed to give borrowers a clearer picture of the overall cost of the loan and make it easier to compare different products.

But it’s important to remember that comparison rates don’t include every possible cost. Government charges, some one-off fees and optional extras may still apply, so it’s important to read the details carefully before signing up for a loan.

Lenders must also include a warning explaining that the comparison rate is based on a sample loan amount and term, so your actual costs will depend on your circumstances.

What rights do you have if a credit provider doesn’t follow consumer laws?

You have several rights and options if a credit provider breaks the consumer credit laws. If you think your lender hasn’t followed the law – for example, if they gave you a loan that’s putting you under financial hardship or they’ve charged you the wrong fees – you can make a complaint and ask for the problem to be fixed through the external dispute resolution scheme (and every licensed credit provider must have one just for these circumstances). These organisations can order refunds, contract changes and compensation. 

You can also get legal advice and, in some cases, apply to a court to change or set aside the contract, reduce or cancel unfair fees and charges, or claim compensation for any loss you have suffered because the law was broken.

ASIC can also prosecute a credit provider for non-compliance with the Credit Act or the Credit Code, including initiating a court case. The credit provider could be liable to pay damages to a consumer, or to a fine or penalty from the government.

Final thoughts for borrowers

Australia’s consumer credit laws are designed to create fairer and safer lending practices for borrowers. Whether you’re taking out a mortgage, applying for a credit card or considering a small personal loan, understanding your rights can help you make better financial decisions and recognise when a lender may not have met their legal obligations. If something doesn’t feel right, it’s important to seek advice early before financial problems escalate. 

Need legal advice about a loan, lender dispute or your rights under Australia’s consumer credit laws? Contact the Armstrong Legal team today.