Understanding and managing loans and debts.
While it makes sense to avoid going into debt, this isn’t always possible. Unexpected expenses can come at any time, and without enough set aside in savings, a loan or credit might seem like your only choice to pay for unexpected or very high expenses.
On this page, we explore the basics of loans and debt and step through some of the things everyone should watch out for as an Australian credit consumer.
Financial risks
There are risks involved with borrowing money and taking on credit. Which makes it important to go into it by knowing the bad from the good.
For example:
- you may go into debt that is too large for you to pay off.
- your interest rate may go up, which could increase repayments at any time.
- your possessions could be taken from you if you can’t make payments on the loan.
Responsible lending
Many institutions like banks often portray themselves as acting in your best interests, yet they make it easy for you to go into debt. This is more about them earning a profit than in helping you have enough money to pay for your goals.
It’s important to know your rights. You are protected by the law and there is help when things go wrong.
Introducing the basics
A ‘loan’ is an amount of money that is borrowed to pay for something with the understanding that it will be paid back after a certain amount of time (a ‘term’), usually with added ‘interest’.
‘Credit cards’ work the same way as loans but can be spent in portions rather than all at once. Any amount of money owed to someone else is called a ‘debt’.
Paying interest
Earning ‘interest’ from you is how the provider makes money on their service. Interest is an amount of money that is periodically added to a loaned amount of money, which is intended to pay the person or company that loaned the money (the ‘creditor’).
Good to know:
- interest is set as a percentage of the first loaned amount (the ‘principle’), plus any interest already added.
- it’s basically the reverse of having savings in a bank account, where you earn interest for storing your money with the bank.
What is debt?
Debt, in the broadest sense of the term, is any amount of money that is owed to someone else. Different types of debt come with varying rates of interest, fees, or other periodic changes that could increase the amount of money you owe.
Examples of debt
- bank loan
- credit card
- ‘buy now, pay later’
- bills of any kind
- a HECS-HELP debt, which is a government loan for studying
- debt from unpaid taxes
- a fine
- many other forms of money owed
📌 See our banking products, paying bills and negotiating, and getting a fine pages.
Cultural attitudes to loans and debt
In Australia, there are types of debt that are culturally considered to be ‘good’ debt. For example, if a loan is taken out to buy a long-term asset like a house (a ‘mortgage’). So, there are times when you are encouraged to go into debt.
What if it’s not allowed in my culture?
Some cultural and religious groups do not allow people to take out loans or engage with any person or company that charges interest. This can make it hard in Australia, which expects that these are acceptable things to do.
It is worthwhile to note that there are many religions that restrict how banking may be done; and many Muslim people who do not choose to bank with Islamic Bank. Just because a particular type of banking product doesn’t exist in Australia does not mean it is either a good or bad product; or way of doing things.
Being a guarantor on a loan
It’s possible for one person to ‘guarantee’ a loan for a family member or friend. If you do this, you are known as the ‘guarantor’, which means you are responsible for paying back the entire loan if the borrower isn’t able to.
Lenders sometimes ask for a guarantee if they don’t want to lend money to the borrower alone.
Before you commit to ‘going guarantor’
It’s important to understand the loan contract and the risks. For example, becoming a guarantor means taking on the potential responsibility for paying back all or part of the debt – it would be like you yourself have taken out the loan. If future you can’t afford it, an arrangement like this may be less than ideal for you.
Where to get advice?
Speak to a financial counsellor if you’re feeling unsure or pressured about a financial decision. It’s a free and confidential service.
To speak to a financial counsellor, contact the National Debt Helpline
| National Debt Helpline | 1800 007 007Online chat |
📌 See our free legal services page
Debt agencies and debt consolidation
There are some paid debt assistance agencies that advertise themselves as a way to get out of debt. They do this by planning your debt recovery for you, by managing your finances on your behalf.
There are also companies that will give you ‘debt consolidation loans’. This might seem like a good idea, but it is important to remember that it is a paid service that will add to your bills. With services such as these, that may not always work in your best interest, you may pay even more in interest in the long run.
No interest loans
No Interest Loans (NILs) allow you to borrow money to help you get back on your feet without having any of the crippling interest or high fees that come with other forms of loans.
How does it work?
NILs are typically offered for up to $2,000-$3,000 for rent or bond, essentials like fridges, washing machines, furniture, kitchenware, medical expenses, car repairs, education fees, and other goods and services you might need.
There are certain rules around who can apply for NILs. Generally, you must:
- have a Health Care Card, a Pensioner Concession Card (or an income less than $45,000 per year after tax)
- have lived at your current address for more than three months
- show that you can repay the loan.
Who provides NILs?
NILs are a service offered by community organisations. You can find providers over at the Good Shepherd website.
Who can help you with debt?
It’s important to know your rights and where to get help if you need it. There is a diversity of support services out there.
Take, for example, the laws and regulations that protect people who enter financial arrangements with banks, other organisations, and other people. You can visit the National Debt Helpline for details.
Useful debt links
Get debt under control – including debt collectors and bankruptcy and debt agreements
National Debt Helpline – debt problems explained
Financial Rights Legal Centre – index of resources that you can search by topic
Negotiating with creditors
You are entitled to fair treatment under the law, and creditors must offer you a fair chance to pay back debts. If they can talk things through with you and agree, most creditors would rather make things easier for you than chase you for a debt you can’t afford to pay back.
What can you ask for?
There are options available to you that could help you reduce, postpone, or spread out bill payments. You can ask your provider for help with:
- payment extensions
- payment plans
- payment matching
- concession information
- financial counselling service referrals.
Where to find information
Financial hardship – what it is, your rights, and what you can do
Template letters – pre-written letters from the Consumer Action Law Centre
Negotiating payment terms – pointers from the National Debt Helpline
When contacting providers, it’s wise to keep a record of when you called, who you spoke with, and what you discussed.
Making a complaint
If you feel you haven’t been treated fairly – especially as it relates to your rights under the law – go direct before approaching an external authority. The course of action recommended by the Australian Financial Complaints Authority (AFCA) is to make a complaint directly with your bank in the first instance.
This information was last updated on 5 June 2023.
The links and resources in this article have been compiled and reviewed by the Brotherhood of St. Laurence. We aren’t responsible for what you’ll find at the links, though we do hope you find the information useful. See our disclaimer if you’d like to know more.
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