Survey reveals 2.1 million Australians in debt stress

Credit providers must familiarise themselves with federal responsible lending laws and ensure their clients are able to properly service their debts or they will risk financial distress themselves, Veda Advantage head of consumer risk Angus Luffman warns.

The comments come as a new Veda Advantage survey, undertaken by Galaxy Research, found 17% of Australians are struggling to repay their debts and have been forced to sell assets, rely on friends or even skip meals to pay up.

Luffman says the responsible lending laws prohibit credit providers from lending, when there is a risk that meeting those loan repayments will cause substantial hardships. He says too many businesses are unaware of the laws and need to educate themselves on how to protect customers, and themselves, from struggling to meet repayments.

“The key message for credit provides here is that the responsible lending laws are important pieces of legislation that need to be understood. Credit providers need to make sure they have systems and processes in place to ensure their clients have the capacity to repay.”

“This means there needs to be thorough investigation before credit is approved. Businesses need to make an assessment about the capacity to repay that ensures reasonable steps are taken and document before credit is even approved.”

The warning comes just days after Dun & Bradstreet released research showing there is a link between defaults of low-value and high-value debts.

The study reveals 2.1 million Australians are currently struggling to repay their debts, including mortgages. These “struggles” include having to sell assets, (which 475,000 Australians have done), skipping means or relying on friends or family.

Nearly one million people have cut back on necessities including groceries in order to make payments, while 700,000 have received assistance from family or friends. Half a million people have shifted debt using balance transfer facilities and 528,000 Australians have used existing lines of credits including overdrafts.

About 200,000 Australians have extended newer lines of credit, including new personal loans, in order to service their debt. The number of Australians currently struggling to repay their bills who plan on taking on more credit has also increased from 13% last year to 15%.

And while Luffman says Veda hasn’t formed a statistical model and what will happen if interest rates rise, he notes that “clearly, when interest rates go up, there is more pressure for borrowers”.

Economists predict interest rates are likely to rise over the next year, with some expecting the Reserve Bank to lift interest rates by 25 percentage points next week to 4.75%.

But Luffman says the report isn’t all bad news. In fact, he says the amount of Australians in distress has fallen from 19% to 17% and that number has remained fairly consistent over the past few years.

“We think this study shows there is an improvement in the amount of people who believe they can repay their debts within their budget. There is an equally consistent message in that around 17% are struggling to repay debts, down from 19%.”

The study also found the proportion of Australians who believe they can service debts within their budget has increased from 57% to 62%.

“We’ve seen over the surveys in the last few years there has been a consistent number, and about one in five Australians at any time are struggling to repay. Also, the national savings statistics are trending upwards, so there is good news in that regard.”

According to the study, the amount of Australians who are either unsure about how to make payments, or are finding it difficult to cope, has changed from 15% in September 2007, to 20% in September 2008, to 16% in September 2009.

Luffman says although that figure has remained stable, businesses still have a responsibility to adhere to responsible lending laws and they should put processes in place to make sure customers have the ability to repay.

“This is the key for businesses. There is a greater responsibility for lenders, and it relates back to the number of those key points about people struggling, and the means by which they can show how they are repaying debts. Credit providers need to show they have this under control.”