Lawlink NSW: Consumer experiences of Avco

spacer image
Consumer experiences of Avco - 2.7
back to contents
Consolidation
2.7.1 Consumers encouraged to consolidate debts with third parties
Avco has a policy of encouraging consumers to consolidate their credit with Avco, that is to borrow money from Avco to pay out existing debts with other creditor providers.

From an Avco brochure:

And talking of getting around to doing things, have you thought about sorting out some of those credit cards? Credit cards are an easy habit to get into and sometimes are not so easy to keep under control.

Avco can help you with finance to clean up your unwanted credit cards and streamline your other bills so you pay one easy monthly payment.

Avco promotes the “benefits” of consolidating these debts as including:

the convenience and ease of having only one payment to make; and/or
the Avco loan is “cheaper” because the monthly payment on the Avco loan contract is lower than the total of the monthly payments on the loan contracts that are consolidated.

Case study 12
The borrowers took out a loan with Avco in November 1988 for $7,700. A year later they approached Avco for a second loan for their personal use. They wanted to borrow approximately $3,000. The Avco employee suggested that they should refinance the loan from November 1988 and the borrowers agreed to this.

The first loan was written at an interest rate of 28.08%. The second loan had an interest rate of 29.51%. The financial implications of refinancing the first loan at a higher interest rate were not explained to the borrowers.

The amount financed under the 1989 loan included an amount in excess of $1,800 to finance the purchase of various forms of insurance, which were not discussed with the borrowers. They were also not informed by Avco that it was securing the debt over their family home. They were unaware that the amount borrowed included fees in respect of the lodgement of a caveat over their home.

In May 1990 an Avco staff member telephoned the couple at home. He told them that interest rates were rising and that Avco was of the opinion that they would continue to rise until they were 21% per annum. He told them that Avco could refinance their home loan fixed at 18% per annum and that this would be in their financial interest. At the borrowers had an existing home loan with a building society. They agreed to enter into a loan refinancing their home loan. Avco advanced approximately $77,000 to pay out the building society’s home loan. At the time the interest rate charged under by the building society was 16.5%. The interest rate on the Avco home loan was 17.23%.

The Avco employee told the borrowers that they had to have life insurance, contents insurance and unemployment insurance with Hallmark. The premiums for the consumer credit insurance policy were $2376, and for the life insurance policy were $1220. In late 1991 the borrowers phoned Avco. They were concerned that interest rates had been falling and they asked Avco whether it was prepared to refinance their loan at a cheaper rate of interest. Avco refused to refinance the loan, and they were told that they would have to pay out the loan through finance from a third party. The borrowers eventually sold their home as the only way of dealing with their financial problems. There was a shortfall to Avco of $6,000.00.

2.7.2 Extra costs of consolidation
As with refinancing (part 2.6) consolidation can result in lower monthly repayments. However many of the factors outlined in part 2.6 which make refinancing loan contracts expensive also apply to the consolidation of loans with other credit providers. The full costs of consolidation are often not explained to consumers.

The following factors, in particular, can result in consumers facing considerable extra cost when they consolidate other loans with Avco:

Higher interest rates
In many cases the interest rates on the loan contracts which were consolidated were lower than the interest rate charged on the Avco loan contract. This is particularly the case when a home loan with a bank is refinanced with Avco. In these cases the difference in the interest rate can be 3% or 4%, resulting in substantial additional interest charges being paid over the life of the contract.

Case study 9
The borrower approached Avco for a loan in October 1991. In the course of the loan application process, the Avco officer asked the borrower if they had any other loans. The borrower advised that they had an existing loan with a finance company. When the borrower arrived at the Avco office the loan contract was already prepared for signing. The amount financed included a sum to pay out the loan with the finance company, even though the borrower had not requested this and it had not been discussed with them. The interest rate under the Avco loan contract was 29.51%, which was more than the interest rate on the loan contract with the finance company, which was only 24%.

Additional security is taken
Often Avco requires consumers to provide security for a loan consolidating other loan contracts. This will often involve additional costs including legal fees or stamp duty charges.

Case study

Mr and Mr F had a small loan with Avco. They refinanced this loan on a number of occasions, each time borrowing more money. Mr and Mr F were having trouble meeting their repayments on a number of other loans they had. An Avco employee suggested they combine all their loan contracts including their mortgage into one loan with Avco. This would result in a lower repayment and would be “cheaper” for them.

Mr and Mrs F took Avco’s advice and refinanced their loans. As a result they were locked into a much higher rate of interest on their mortgage, had all their personal loans secured over their home, and were considerably worse off financially. Mr and Mrs F fell into arrears soon after and Avco sold their home.

Case studies 2, 4, 9, 11, 14, 41 and 60 in Appendix A further illustrate consumers’ experience of consolidating their loans with Avco.

2.7.3 Consumer concerns

For similar reasons as outlined in part 2.5 above, the consumer is often unaware of the financial disadvantages of consolidating loans. The difficulties for consumers in comparing the different costs of credit are exacerbated under the Consumer Credit Code as it allows for up front fees to be charged which can distort the effective rate of interest being charged.

The failure to explain the costs and benefits of refinancing an existing loan contract can lead to consumers entering into unconscionable or unjust loan contracts.[See legislation listed at 4 above.]

| Previous Page | Back to LAC | Top of Page |

You are Required to Read the Copyright Notice & Disclaimer | Webmaster | Feedback

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