September 12, 2015

Borrowing money can include anything from taking out a loan to buy a car or home, or, buying goods on credit through hire purchase.

Any agreement you sign to take loan must take into consideration your legal rights under the Consumer Credit Act 1999, Consumer Credit (Amendment) Act 2006 and Regulations 2009. However, this legislation will not protect you when you borrow from a money lender, relatives or friends.

Findings from various consumer movements reveal that consumers around the world face a range of problems in their dealings with Financial Services providers, from irresponsible lending practices to unfair contracts, abusive charges and advice by sales people lacking in objectivity.

The Council has for many years campaigned for consumer centered regulation in financial services, to create a balance between prudential regulation and financial consumer protection measures to allow regulators and others to engage with consumer issues in a coherent and comprehensive manner. It is often assumed that consumers behave perfectly and have the skill to make informed decisions. The reality is that consumers have unspecific and inconsistent preferences, and cannot always calculate the best product for them. Financial services are also notoriously complex markets for consumers to navigate.

Unfortunately Consumer Credit Act cannot protect consumers who are the victims of irresponsible lending.  Irresponsible lending involve lenders (especially persons working in banks and credit institutions) ignoring the consumer’s ability to service their loans as discerned from a mismatch between their income (or economic status) and the loans offered. It also involves improper financial advice and lack of due diligence by the lender in checking the financial status of the borrower.

The Council has come across cases where consumers were given loan despite their inability to pay.

Case Study

Reena, a 59-year-old widow had borrowed more than what she could afford to pay back. Unexpected medical bills and no permanent job left her in an unfamiliar negative situation with her creditor. She had a monthly repayment of $262 to think about, for a personal loan she had secured with her bank in 2009.

Reena’s only source of income was her FNPF pension of $300, which she received every month. After making her monthly repayment of $262 to her bank, she was left with only $38 to meet all other expenses for the month.

What can you do with just $38 for thirty odd days?  It was a never-ending challenge for Reena to live within that $38 budget. However, she sought help from the Council. We negotiated to have her account restructured to a monthly repayment of $175, leaving her with $125 to meet other expenses. Reena believes that if she was provided a full disclosure by her lender about the repayment amount, she would have understood her ability to make the monthly repayment.

Consumers must obtain a pre-disclosure statement before taking loan. Being aware of the total cost of borrowing can prevent consumers from taking up expensive loans that they can’t afford to pay.

Pre-disclosure statement will give important information such as:

• Amount of  credit, annual interest rate, total interest to be paid
• Calculation of repayments, amount for each repayment, when it is due,  and  what it is made up of (loan, interest, administration charge)
• process that comes into effect  if you default
• All types of fees and charges (hidden charge) related to the loan you are taking and not a general fees and charges brochure.

Pre-contractual disclosure helps the consumers to compare the prices of the products and get the best deal which suits their budget. It will help them to answer the question, ‘What is the cost of the loan?’

Remember- As consumers, you have a legal right to ask for pre – contractual disclosure statement before you purchase a product on credit or take loan. Financial institutions cannot refuse to give you the statement by imposing conditions such as ‘pre-contractual disclosure’ will be given once you buy the product or confirm that you will take the loan.

With pre-contractual disclosure statement, the consumer must expect the same information to be included in the credit contract they sign and it is their responsibility to read before signing.

There are lenders who will give you this information just before the signing of the agreement. If you have not had time to read the contract or take second opinion, you can always defer the signing of the contract. It is important for you to understand what you are signing and what your financial obligation is.