Consumer experiences of Avco - 2.2 back to contents Interest rates 2.2.1 High interest rates Avco’s interest rates are amongst the highest of any mainstream lender, with unsecured loans often provided at rates up to 29%. Avco promotes its loan products not on the basis of the cost but other factors (see Part 2.1 above). Accordingly, consumers are often unaware of the cost of credit when they first contact Avco. Avco targets a wide cross-section of the community, offering to lend to the less well off as well as the wealthy. Many of Avco’s customers are either functionally illiterate or innumerate, poorly educated, financially unsophisticated or young and inexperienced. These consumers are unable to easily protect their own interests and are generally more reliant on verbal communications than written ones. As a result, many consumers become aware of the cost of the credit provided by Avco only when they get into financial difficulties and seek assistance. Figure 2.1 illustrates the level of interest rates charged by Avco on its loans. 2.2.2 Failure to pass on interest rate falls to consumers In the late 1980s the Credit Licensing Authority in Victoria held a hearing to determine whether or not Avco should be granted a licence to provide credit (see Part 3 below). During the hearing it was alleged that Avco lent money at interest rates that were excessive. In responding to this allegation Avco stated that in March 1989, because of the escalating cost of funds, all personal loans were written at an interest rate of 29.5%. The only exception to this was that long standing customers were in some cases, with the supervision of the regional manager, offered a rate of not below 26%. Since 1990 there has been a general and significant decline in the cost of funds which, presumably, has benefited Avco as well as other financial institutions. If this is the case then Avco, which continues to lend at rates around 29%, has significantly increased its profit margins at the expense of consumers. 2.2.3 Unfair pricing Interest rates are the “prices” that a credit provider charges for its product. These prices should, to some degree, reflect the cost to the credit provider. Part of the cost to a credit provider is the level of risk of the loan not being repaid. The experiences of consumers with Avco loans is that the interest rates often do not fairly reflect the risk to Avco of the loan not being paid. This is demonstrated by the fact that Avco’s interest rates are typically not lower where: a second loan is secured (when an earlier loan was unsecured); or Avco is protected against the risk of default by one or more insurance policies (see part 2.5 for more detail). Figure 2.1 Comparison of Avco’s interest rates The following table show interest rates on Avco loan contracts from 1990 to 1996, and compares these rates with other mainstream credit providers [The Avco interest rates taken directly from loan contracts provided by consumers to their advisers and/or from copies of loan contracts obtained directly from Avco on behalf of consumers. Indicator lending rates are taken from Reserve Bank of Australia Bulletin. The represent the mid-point rates of major banks. Commonwealth Bank of Australia interest rates are the standard variable home loan rates as advised by the Bank. Note: The standard variable rate may change one or more times during any one year. In these cases the rate included in the above table is the rate which prevailed for the longest period during that year]. In these tables: “Unsecured loans” refers to loans which are not secured by a mortgage over any good or property. “Secured loans” refers to loans secured by a mortgage over goods, but not a mortgage over real property. “Home loans” refers to loans for which the majority of the amount lent is used to purchase a residential dwelling or pay out a previous loan that was used to purchase a residential dwelling, and which is secured by a mortgage over that dwelling. Interest rates on unsecured loans Avco Bank indicator lending rate 1989 31.51% 20.4% 1990 31.51% 20.6% 1991 29.51% 18.6% 1992 29.51% 15.8% 1993 29.51% 14.8% 1994 29.51% 13.0% 1995 29.91% 14.0% 1996 29.51% 14.0% Interest rates on secured personal loans Avco Bank indicator lending rate 1990 29.51% 21.0% 1991 31.01% 18.9% 1992 31.51% 16.3% 1993 28.010% 14.8% 1994 29.51% 11.6% 1995 29.91% 12.2% 1996 29.51% 12.4% Interest rates on home loans Avco Commonwealth Bank 1989 21.29% 17.00% 1990 17.238 % 16.25% 1991 n/a 13.00% 1992 n/a 9.90% 1993 14.901% 8.75% 1994 14.401% 8.75% 1995 18.65% 10.50% 1996 14.401% 9.75 Case study 13 Ms T entered into a loan contract with Avco for $3,500 in March 1995. The contract included premiums of $320 for disability insurance, $82 for unemployment insurance, and $100 for life insurance. The interest rate under this contract was 29.51%. Ms T entered into a second loan contract with Avco in August 1995 for $10,846.96. This refinanced the first loan contract. The loan was secured by a second mortgage over her house, and a goods mortgage over a motor vehicle. The interest rate under the second loan contract was 29.91%. The second loan contract also included premiums for insurance with Hallmark. The amount of these premiums were: for CCI, $1029.19; for unemployment, $419.38; and for life insurance, $516.59. 2.2.4 Consumer concerns When compared with interest rates charged by other credit providers Avco’s interest rates are very high. Consumers should be offered a reduction in the interest rate charged where consumer credit insurance is taken out by the consumer, given that Avco’s risk of not receiving payment is thereby diminished. Consumers should be offered a reduced interest rate where the loan is secured.

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