Simple loan disclosures recommended

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Last updated 15:43 03/12/2013

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Borrowers should be presented with standardised documents showing loan fees, interest and terms and conditions by lenders before they are permitted to take out a loan.

This idea could stimulate competition by making it easier for borrowers to compare loan offers and shop around, the commerce select committee was told at hearings in Auckland on Monday.

The committee was hearing submissions into the Credit Contracts and Financial Services Law Reform Bill, which contains proposals to overhaul consumer lending. They include increasing transparency at the lower end of the lending market where fees and interest rates are high, and competition weak.

The idea of standardised, simple disclosure of fees, interest and conditions, is being proposed as an alternate to a section of the bill requiring lenders to display this information in their business premises.

Requiring the information to be displayed is expected to make it easier for borrowers to shop around for the best deal.

Borrowers at the lower end of the lending market are often not given loan details, including commissions and insurance costs until deep into the loan application process.

But banks are opposed to the proposal to display loan information, arguing that it is is impracticable given the wide range of loan types they offer and the array of pricing involved.

The banks also say they are having new costs loaded onto them as a result of measures designed to rein in the abuses of loan sharks.

In its submission, ANZ said that improving "how lenders disclose their fees" would increase transparency, promote competition without creating ''information overload'' for consumers or cluttering up bank branches.

"An effective way to help borrowers understand their credit contract may be to develop a very short summary disclosure document that can be given to a customer or read out before the contract is entered into," ANZ said.

This would allow banks to continue to provide loans over the phone or online.

"Borrowers are more likely to absorb simple information, making it a more useful and effective form of disclosure."

The Law Society also opposed the proposal for disclosure displays on premises.

Society spokesman Simon Haines said disclosure displays could lead to higher loan costs if they simply proved that borrowers at the lower end of the market did not choose a lender based on the interest rates and fees charged.

The committee also heard that the more information that was required to be provided to customers the less likely they were to read it.

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Financial literacy expert Kym Dalton advocated bringing in a system requiring lenders to ensure prospective borrowers understood the fees and interest being charged and the consequences of failing to make repayments.

- Fairfax Media

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