Lawlink NSW: Consumer experiences of Avco

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Consumer experiences of Avco - 2.4
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Lending guidelines
2.4.1 Overcommitment
Avco is a lender of last resort for many consumers. Consumers report that Avco agreed to lend them money after they were refused credit by other credit providers. The refusals were often because the credit provider decided they were a credit risk that was not worth accepting on the basis that they could not afford to repay the loan. Not surprisingly many of these consumers fall into default soon after signing the loan contract with Avco.

Case study 6
The borrowers had numerous debts (including two personal loans, a housing loan and a credit card account). They were also in arrears with their housing loan. In March 1997 they approached Avco for a further personal loan for furniture.

Avco refinanced their existing personal loan (of $7,000) as well as providing an extra $4,000 for the furniture. The amount borrowed also included premiums for disability insurance (of $2,350), and credit life insurance (of $1,128).

The borrowers are now in arrears on this Avco loan (even though it was only entered into in March 1997) and are still in arrears on the housing loan. They are offering to pay extra to bring these two debts up to date by missing payments on their other loans. The borrowers cannot afford to maintain the payments on all their debts.

Many consumers who are overcommitted often approach Avco when they are already in financial difficulty and are accordingly under a great deal of stress. Many consumers are, therefore, initially grateful to Avco for agreeing to lend them money. However because of Avco’s high rates of interest the consumer will, if they default on the loan, often be worse off financially than if Avco had not lent them money.

2.4.2 Asset based lending
Many of Avco’s loans are made to overcommitted consumers where the loan is secured by a mortgage over an asset such as a car, caravan or home. This practice is known as “asset based lending” and is regarded by the consumer movement as improper as it is likely that the consumer will default resulting in the consumer losing the asset while the credit provider profits [Section 70(2)(e) Consumer Credit Code makes reckless overcommitment a factor in deciding whether a loan is unjust. It is arguable that asset based lending, in many circumstances, amounts to reckless overcommitment.]

Many consumers report that Avco agreed to lend to them on the condition that they refinance their home loan with Avco. As is outlined in Part 2.6 below, this can result in considerable extra cost to the consumer over the term of the loan. This form of asset based lending can also cause extreme hardship to the consumers and their families if they default on the loan and are forced to sell their homes.

Case study 39
The clients had a home loan with a bank for $85,000. In 1996, due to a fall in their income, the clients got behind on their payments to the extent that the balance on their home loan had risen to $93,000. The Commonwealth Bank threatened to foreclose. Avco agreed to refinance the mortgage and also convinced the clients to refinance two other loans with finance companies at the same time. The interest rate on the bank loan was 9.75%, while the Avco loan was written at 14.401%. The amount lent to the borrowers was over $107,000, repayable by 300 instalments of approxiamtely $1300. The amount borrowed included premiums of over $4200 for consumer credit insurances.

The clients were unable to maintain the payments and Avco have threatened to commence proceedings to sell their home. The clients have put the home on the market and are facing a shortfall to Avco after sale.

Case studies 4, 6, 11 and 27 in Appendix A further illustrate consumer experience of Avco’s lending guidelines.
2.4.3 Consumer concerns

Consumers are often grateful to Avco for lending them money in circumstances where other credit providers have refused their applications for credit. However, the fact that other credit providers have refused credit often means that the consumers will have difficulty making the repayments. Accordingly there is an increased chance of those consumers defaulting on their Avco loans causing hardship to them and their families. This hardship is increased where the loan is secured by the consumers’ car or home.
Asset based lending may constitute reckless overcommitment within the meaning of 70 of the Consumer Credit Code making the loan contract unjust.
Avco should ensure its lending guidelines are responsible and are based on the consumer’s capacity to pay and not whether loans are secured by the consumer’s goods and home.

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The information contained on this page is not legal advice. If you have a legal problem you should talk to a lawyer before making a decision about what to do. The information on this page is written for people resident in, or affected by, the laws of New South Wales, Australia only.

most recently updated 22 June 2000