PERSONAL LOANS (unsecured)
Page last updated on 08/07/2020
What do the changes mean?
- The approach for financial hardship is going to be very similar to the approach taken before the pandemic
- It has traditionally been difficult to stop or reduce interest on personal loans. It is worth trying to negotiate a reduction in the interest rate (or ask for it to stop for a few months) during the pandemic
- It is likely your client will have been offered a deferral of payments for a period of time
- Waivers or reductions in debt should be available for people in significant long-term financial hardship
- Stimulus payments and the coronavirus supplement should mean that some people can settle a personal loan debt for a reduced amount as a full and final settlement offer
- Personal loan debt remains a low priority debt if it is unsecured
- You need to consider immediately cancelling the direct debit for any repayment arrangement your client can no longer afford. Talk to the lender about different methods for making payments.
- If the personal loan is secured by a car see car loans
What do you do differently?
- Do inform the lender if your client has been financially impacted by the COVID-19 pandemic
- Do let the lender know if your client is receiving JobSeeker or JobKeeper payments
- Take extra care to avoid deferring payments where interest and fees are still being charged
- Make sure you consider the following issues in your negotiations:
- Late fees and default/legal fees not to be charged
- Attempt to negotiate a reduction in the interest rate
- Repayments must be affordable
- Repayment arrangements will need to be reviewed because the pandemic is likely to be causing an impact for many months (and likely more than a year)
- Negotiate an extension of the term of the loan. Do not assume your client can come out of financial hardship in the pandemic being able to afford higher repayments
- Where your client is in significant medium- to long-term financial hardship, a waiver or part waiver may be considered
- Negotiate a debt reduction in full and final settlement if the client has funds and the settlement would help financial stability
- Ask for your client’s credit report to be marked as paid for the purposes of repayment history information (“0”) if a repayment arrangement is made (and your client keeps to it)
- Ask for all enforcement to stop and that the lender contact you before they start/re-start enforcement action
Common problem: personal loan deferrals
Many people with a personal loan may be offered a deferral of repayments. Such deferrals can cause major problems because the interest, fees and debt will compound. This can lead to a much larger debt, which then decreases the possibility of making a workable repayment arrangement down the track.
If your client has a lot of debts, a loan deferral may be a best first step so the payment of other debts (such as the home loan and utilities) can be prioritised.
If your client has few other debts, it is recommended that your client keep paying the personal loan with an affordable repayment amount. If the client has already accepted the deferral, it is recommended that you talk to them about debt priorities and continuing payments if affordable.
Common problem: extending the term of the loan
Before the pandemic it was sometimes difficult to make a repayment arrangement that extended the term of a personal loan. Some lenders insisted on the loan being refinanced or formally restructured to extend the term of the loan.
There is no need for a formal restructure or refinance to make a repayment arrangement. The variation can be agreed in a simplified way in writing.
You should negotiate for an extension of the term of the loan where this will assist your client to make affordable repayments.
FCA Toolkit - Bank responses (personal loans)
Australian Banking Association: Support during COVID-19 – The Personal Relief Package(announced March 2020)
What has not changed?
Personal loans in default can still be sent to a debt collection agency
Lenders can start legal proceedings to seek a court judgment for the debt (if it is in default)
You should always check if the lending for the loan was irresponsible and run a dispute if it was