Consumer experiences of Avco - 2.6 back to contents Refinancing 2.6.1 Consumers encouraged to refinance Avco actively encourages consumers to refinance their existing loan contracts with Avco. If a consumer with an existing loan approaches Avco for a further advance, the consumer is typically not offered a second loan running side by side with the first one, but will be asked to refinance the first loan. Further if a consumer is in financial difficulty Avco (as discussed in Part 2.4) will often offer to refinance and extend further credit. Avco promotes refinancing on the basis of “convenience”, in that the consumer will have only one “easy” repayment instead of two. Refinancing loan contracts can result in lower monthly repayments which is of benefit to some consumers. However, it is often not explained to consumers that refinancing usually results in consumers paying more over the life of the loan contract (part 2.6.2). In these circumstances consumers cannot make an informed decision about refinancing. 2.6.2 Extra costs of refinancing Refinancing an existing loan contract can result in extra costs being incurred for the following reasons: Increase in interest rate charged Usually the annual percentage rate on the later loan contract with Avco is the same as that on the earlier loan contract. However, in some circumstances this is not the case. For example, many consumers take out the first loan contract with Avco to purchase goods through, for example, a furniture store. These loans are often provided at very low rates of interest, sometimes interest free. When the consumers refinance these loans, the interest rate on the later loan contract will be at Avco’s usual rates and the difference in cost to the consumer is significant. Payment of interest on interest The amount advanced under the second contract to pay out the first loan contract will include a component for interest. By refinancing, the consumer pays interest on this amount which they otherwise would not need to do and as a result the consumer will often pay more than they would have if two separate loans had been taken out. The worked example in Figure 2.2 demonstrates this extra cost. Additional costs in respect of new insurance policies on the later contract Consumer credit insurance policies on the first loan will be cancelled at the time of refinancing, and the consumer will receive a rebate. However, the way in which the rebate is calculated and the increase in the amount borrowed means that the cost of the insurance policies where the first loan is refinanced will generally be greater than the cost of policies on two loans running side by side. Figure 2.2 Costs of refinancing The following example shows how refinancing can result in significantly increased costs to the consumer. Calculations are made in accordance with the Credit Act. A. Calculation of the interest payable if two loans run side by side: Loan 1 $3000 @ 29.51% over 36 months. Credit charges = $1556 Loan 2 $1500 @ 29.51% over 36 months. Credit charges = $778 Total borrowed = $4500 Total Credit charges = $1556 + $778 = $2334 B. Calculation of the interest payable where the first loan is refinanced: Loan 1 $3000 @ 29.51% over 36 months. Loan 1 is paid out after 12 months, assuming no arrears. Pay out figure = $2329.52 Accrued credit charge = $848.13 Loan 2 $1500 (Advance) + $2329.52 (Refinanced from first loan) = $3829.52 @ 29.51% over 36 months. Credit charges = $1986 Total borrowed = $4500 Total Credit charges = $848.13 + $1986 = $2834.13 (or $500.13 more expensive) C. The additional amount paid is even greater if the term of the loan is increased: For example, assume that Loan 2 in example B runs for 4 years not 3 years. Loan 2 A/f is $3829.52 @ 29.51% over 48 months. Credit charges = $2737 Total Credit charges = $848.13 + $2737 = $ 3585.13 (or $1251.13 more expensive) Additional credit charges where the term of the credit is lengthened Where the amount borrowed is increased the term of the contract may also be lengthened, for example, from three years to four years. This will significantly increase the amount of money ultimately payable under the contract. See the worked example in Figure 2.2 for an illustration of this extra cost. Case studies 6, 11, 12, 28, 29, 31, 38 and 40 in Appendix A further illustrate consumers experience of refinancing their loans with Avco. 2.6.3 Consumer concerns Although refinancing can provide some benefit to consumers by reducing monthly repayments on a loan, refinancing an existing credit contract is often expensive. Avco often does not provide the consumer with a comparison of the different costs of the different methods of structuring the transaction, and accordingly consumers cannot make an informed decision about whether to refinance or to have two loan contracts running side by side. The failure to explain the costs and benefits of refinancing an existing loan contract may lead to consumers entering into credit contract that are unconscionable or unjust [See legislation listed at 4 above].

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