Need to know
- It's critical to avoid bad financial moves during the pandemic, such as falling prey to a predatory lender
- Borrowers and customers in financial trouble have long been entitled to hardship arrangements from lenders and businesses
- Financial advisers may have a limited role to play if your finances are complicated, but a little free financial counselling can go a long way
It's no secret that the coronavirus (COVID-19) outbreak isn't just a health crisis, it's a financial one too.
As job losses hit record highs, and savings and super go the other way, many of us are struggling to hang on.
In the current climate, not taking the wrong steps is just as important as taking the right ones.
Many businesses – especially ones whose business models were already dubious before the pandemic hit – have sunk even lower in an attempt to exploit the crisis.
The list of usual suspects would certainly include buy now, pay later schemes, payday lenders, and consumer lease businesses.
Last time we checked buy now, pay later (BNPL) market leader AfterPay's homepage was all about loading up on fancy stuff when you're stuck in your house.
AfterPay's uplifting message seems to be: there're a lot of things we can't do out in the world these days, but we can still get in debt right from the comfort of our own homes!
The list of usual suspects would certainly include buy now pay later schemes, payday lenders, and consumer lease businesses
With BNPL schemes you're spending money you don't have, and you'll face ongoing fees if you can't pay the loan back in time – something that happens to more people than you might think.
As we explained in an earlier investigation into BNPL schemes, the revenue generated from late fees has gone up year on year for the likes of AfterPay.
Payday loans are arguably the worst option. They're so named because people often take them out with the intention of paying off the balance when their paychecks arrive.
By the time that happens, though, many customers have borrowed more than their incomes and have to take out another loan – and so the downward spiral of debt begins.
It's not unusual to get hit with what amounts to a colossally high interest rate and end up paying back a lot more than you borrowed. (They'll call it a 'fee', but what you'll end up owing can include the equivalent of 400% interest.)
Of all the bad financial moves you could make, a payday loan is probably the worst.
With consumer leasing businesses such as Radio Rentals, you could well end up paying for an appliance or other needed item many times over before you actually own it.
These businesses prey on consumers who need a fridge or essential item but don't have enough to pay for the whole thing.
The dodgy deals are basically lay-by programs on steroids: we've seen a case where one vulnerable person ended up paying $3300 for a used bed and mattress valued at $430.
In another case, a woman who bought a couple of vacuum cleaners with a combined value of $991 forked over a grand total of $3900.
We are very concerned about a spike in predatory lending to people who are struggling to make ends meetConsumer Action's director of policy and campaigns Katherine Temple
Desperate times can lead to desperate measures, but falling prey to a predatory lender should not be one of them.
"With thousands of Australians set to lose work over the coming months and household finances getting tighter, our financial counsellors anticipate a deluge of people with payday loans and other debt," says Consumer Action Law Centre's (Consumer Action) director of policy and campaigns Katherine Temple.
"We are very concerned about a spike in predatory lending to people who are struggling to make ends meet. We have already seen fringe lenders such as Cigno saying that they will 'assist' people when other lenders won't. Payday lenders market themselves as a stop gap for people caught in a tight spot, but the reality is that the eye watering fees just lead to a long term debt trap."
Consumer Action is calling on the government to put the brakes on all payday lending for at least six months.
If the COVID-19 crisis has brought on financial hardship and you're having trouble paying rent, your mortgage, your utilities or your loan repayments, the best move is to contact lenders and talk them through your situation – the banks and businesses in question have a legal obligation to work with you on a reasonable payment plan.
The plan might entail making smaller payments for a longer term, or pausing payments altogether until you actually have some income coming through the door.
"Many businesses have hardship teams that specialise in helping people in financial hardship," says Financial Counselling Australia (FCA) CEO Fiona Guthrie.
Many businesses have hardship teams that specialise in helping people in financial hardshipFinancial Counselling Australia CEO Fiona Guthrie
With home loans or any loan, lenders "have a legal obligation to consider and respond to reasonable requests for repayment arrangements," Guthrie says.
"If that responsible request is rejected, people have the right to have that decision reviewed and decided for free by the Australian Financial Complaints Authority (AFCA)."
In many cases, the banking industry (despite its chequered past) has taken steps to rise to the occasion in recent weeks.
The Australian Banking Association has useful information on what banks are doing to support borrowers thrown into financial distress by the pandemic.
Renters should also reach out to rental agents and landlords with an update of their financial situation, according to Guthrie.
Renters should definitely contact their landlord or estate agent to try and negotiate a temporary reduction in rent if they are in financial difficultyFinancial Counselling Australia CEO Fiona Guthrie
"Renters should definitely contact their landlord or estate agent to try and negotiate a temporary reduction in rent if they are in financial difficulty," she says. "If a reduction in rent cannot be negotiated, people should get advice from their free tenancy advice service."
And there's good news from the federal government, which recently announced that renters will be protected from evictions if they fall behind in payments.
Utilities and telcos also have to give you some leeway if you're cash strapped.
"If your energy, water or telco is refusing a reasonable request for hardship, that decision can be reviewed and decided in a free dispute resolution scheme," Guthrie says. "For energy and water there are separate state ombudsman schemes and for telcos there is the Telecommunications Industry Ombudsman (TIO)."
No interest loans (NILS) are loans of up to $1500 that come miraculously unburdened by interest, fees or any other charges. And they actually do exist.
They're available to buy essential goods or services (washing machines, car repairs, medical services, etc.) if you have a pension or healthcare card or earn less than $45,000 a year after tax (or $60,000 for couples or people with dependants).
You also have to have lived at your current or previous address for three years and have the capacity to repay the loan over time.
Repayments are set at a rate that makes payday loans look like the brutal loan-sharking products they really are.
Find your nearest NILS provider at nils.com.au.
People experiencing financial hardship in the midst of the pandemic should talk to a free financial counsellor as a first step.
The coronavirus crisis may have thrown your finances into such disarray that some professional help from a financial adviser may actually be in order.
But a bit of simple, free advice from a financial counsellor (not adviser or planner) will probably do the trick.
First, it's important to understand the difference. "Financial counsellors are quite different to financial planners, who provide advice about investment," says Guthrie.
"Financial counsellors help people experiencing financial difficulty. They can discuss how to work out affordable payment plans, how to access government programs, how to lodge complaints with various ombudsman schemes if you feel you aren't being treated fairly, and whether you should have been given a loan in the first place, among a host of other issues."
Financial counsellors are quite different to financial planners, who provide advice about investment.
Financial counsellors help people experiencing financial difficultyFinancial Counselling Australia CEO Fiona Guthrie
But if you're looking for advice from an investment and planning perspective, proceed with extreme caution.
CHOICE played a significant role in a very long and often ugly battle aimed at getting most conflicted, commission-driven advice out of the financial-advice sector.
The longstanding problem was that so many advisers were paid by big financial companies to flog their products – "vertical integration", they called it (and still do).
The advisers had effectively become salespeople for the big banks rather than professionals dedicated to the best interests of their clients.
It's no accident that one of the key provisions of the Future of Financial Advice (FoFA) reforms that supposedly put an end to all this is a "best interest" duty.
This means financial advisers now have to put your interests above theirs, which should mean no more chasing commissions and bonuses at the expense of the client.
Financial advisers now have to put your interests above theirs...But it's a still a sector fraught with danger
But it's a still a sector fraught with danger, especially if you end up paying for financial advice you don't need or, in many cases, never received (in recent years, an impressive line-up of heavy hitters – AMP, ANZ, NAB, Commonwealth Bank and Westpac – has been caught out for charging for advice that was never delivered).
And you could still be paying percentage-based fees (one percent of the value of your account per year, for instance) with no real clarity about what you're paying for.
These "asset fees" are really just commissions by another name, and more or less fly in the face of the FoFA reforms.
If you do need help navigating your financial options in times like these, use the Financial Rights Legal Centre's financial counsellor search tool.
You can also call the National Debt Helpline on 1800 007 007 or visit ndh.org.au for more helpful resources.
Government support payments can be hard to navigate, but it's worth making the effort.
If you're going to hire a financial adviser, you should pay them on a fee-for-service basis only. If your finances have got tricky in these difficult times and you genuinely need professional advice, a financial adviser should be able to offer specific one-off guidance that you only pay for once, or as needed in the future.
Such advice should cost about $1500, which will be money well spent if the advice is good.
If you're going to hire a financial adviser, you should pay them on a fee-for-service basis only
We're not authorised to recommend a financial adviser or firm, but we can point you to one of our allies in the fight against conflict-of-interest in the financial advice industry – the Independent Chair of the Australian Defence Force (ADF) Financial Services Consumer Centre, Air Commodore Robert Brown AM.
His list of commission-free financial advisers, put together for ADF personnel, is also open to other Australians.
But be advised that we don't endorse or recommend any individual adviser from this list or any other list, since we haven't checked their credentials ourselves.
If you're looking for a financial adviser from the ADF list or anywhere else, our guide to financial planners will help you keep them honest.
Brown is no stranger to the depredations of the financial advice industry, many of which are still with us, even with FoFA in place.
I'm certainly not suggesting that most advisers are dishonest, but I am suggesting that most of them are conflicted, resulting in serious doubt about the quality of their adviceChair of the ADF Financial Services Consumer Centre, Air Commodore Robert Brown AM
"Unfortunately, the financial-advice industry is driven systemically by conflicted remuneration of many kinds," Brown says.
"I'm certainly not suggesting that most advisers are dishonest, but I am suggesting that most of them are conflicted, resulting in serious doubt about the quality of their advice. Clients who want reasonable assurance that the advice they receive will be in their best interests should seek an adviser who does not receive conflicted remuneration of any kind. They should seek a fee for service adviser who charges hourly rates or flat or fixed fees".
The financial-advice industry is calling for a relaxation of the FoFA reforms during the pandemic so that advisers won't have to take so many steps to make sure they're offering the best possible advice for the client.
We think this is a very bad idea.
The share markets (along with your super account) have been all over the shop in recent weeks. Now is not the time to make drastic changes to your portfolio.
News from the share markets has been particularly troubling: emotion-driven trades have the markets bouncing up and down like a yo-yo once again.
It's confusing trying to keep track, but one thing is clear: now is not the time to panic and make drastic changes to your investment portfolio, either inside or outside your super account.
Our in-house experts at Super Consumers Australia (SCA) explain why in Could the COVID-19 coronavirus impact your superannuation?
The vast majority of super accounts have a "balanced return" asset allocation, meaning they're mainly a mix of shares, fixed-income investments (mostly bonds) and property.
This is where you want your investments to be right now. It's all about minimising risk by having a broad portfolio.
Super accounts took a shellacking during the global financial crisis, but many fought their way back to strong returns over the long haul
Super accounts took a shellacking during the global financial crisis, but many fought their way back to strong returns over the long haul (to be clear, many underperforming funds did no such thing).
For older Australians, there may be an argument for rebalancing your portfolio towards less risky investments such as cash and fixed-interest products.
But account holders should proceed with extreme caution.
It's pretty much never a good idea to raid your super account for short-term financial survival and here's a reason there are rules against this in most circumstances.
And watch out for super-related scams. Since the government announced in March that people in financial straits can have access to part of their super accounts from mid-April, there have been 87 reported incidents of scammers cold-calling people and saying they're from organisations that can help them gain access to their accounts.
Be wary of callers who claim to be from a government authority asking about your superACCC deputy chair Delia Rickard
ACCC deputy chair Delia Rickard offers some sage advice.
"Never give any information about your superannuation to someone who has contacted you. Don't let them try to pressure you to make a decision immediately, take your time and consider who you might be dealing with.
"Be wary of callers who claim to be from a government authority asking about your super. Hang up and call the organisation directly by doing an independent search for their contact details."
There's been a lot of talk about the opportunity to snatch up undervalued shares and rake in the returns, post pandemic, when their value inevitably rises again.
No doubt there are such opportunities out there, but unless you're an investment expert yourself or are good friends with one, we recommend you take great care when it comes to tweaking your portfolio (if you have one outside of super) to try to cash in on the current crisis.
Lots of shady characters show up and start making noises about making a killing in real estate or investment schemes in times like these.
Australia still lacks a compensation scheme of last resort for victims of fraud who can't collect on legal judgments in their favour
It's important not to forget the lessons of huge investment scams such as Storm Financial and Opes Prime, in which many mum-and-dad investors were deceived by financial advisers, lost everything and got very little – if anything – back.
Australia still lacks a compensation scheme of last resort for victims of fraud who can't collect on legal judgments in their favour. Why? Because the businesses went under and the money's gone.
Trusting that your super account or investment portfolio will eventually recover (as long as you don't have all your eggs in one basket) is one thing. But not being able to meet your mortgage payments or pay rent or bills is another.
So many Australians are in this boat at the moment that the government has taken extraordinary steps to stop the economy from tanking altogether.
Along with the hardship arrangements already available, financial support to the tune of $84 billion was rolled out in late March, mainly to help people who have lost their jobs or were already on incomes that barely met the cost of living, or didn't meet it at all.
People who have mortgages to pay are under particular stress, and (as outlined in the ABA link above) many banks are offering to defer home loan repayments for up to six months.
Some of the offers of coronavirus relief are dressed up to look like they've just been dreamed up in boardrooms by compassionate banking executives eager to help
But that's a very different thing than waiving the payments altogether. It just means you'll pay down the track, plus interest.
(The industry buzzword is "interest capitalisation" – the interest you don't pay for those mortgage-free months will be added to the balance of the loan.)
When you defer a payment you generally lengthen the loan and end up paying more in the long run, if your bank agrees to draw it out.
The alternative is generally to make bigger monthly payments after the deferment period is over.
But deferring your payments is certainly a better option than defaulting on your home loan, which can ruin your credit rating for a long time.
Some of the offers of coronavirus relief are dressed up to look like they've just been dreamed up in boardrooms by compassionate banking executives eager to help.
Lenders have long been obligated to change the terms of a loan in hardship cases to make it easier – or possible – for borrowers to repay
In reality, lenders have long been obligated to change the terms of a loan in hardship cases to make it easier – or possible – for borrowers to repay, as the FCA's Fiona Guthrie explains above.
(To be fair, some lenders are permanently lowering rates for borrowers in response to COVID-19, a laudable move that isn't mandated by government regulations. In truth, though, ANZ's move to reduce all variable home loan rates by 0.15% as of 27 March 2020 and other such tinkering can only do so much to help.)
Also, deferring your mortgage payments for a while creates a good opportunity to review your mortgage package.
Interest rates are as low as they've even been. It may be time to refinance at a lower interest rate, with either your current or a different lender.
Even small decreases in interest will mean significant savings over the life of the loan.
If you took out a home loan – or any loan – anytime after March 2013, the rules around hardship variations are simple: your lender will have to offer a hardship package if you can demonstrate you're suffering financial hardship.
With the coronavirus swinging a wrecking ball through the economy, that probably won't be hard to do. Proof of job loss should be enough.
If you took out a loan before March 2013, the hardship variation rules are trickier.
If you borrowed $500,000 or less some time between July 2010 and February 2013, you're eligible for a hardship variation on the terms of your loan.
Repayment arrangement in the pandemic will need to be flexible and may need to be reviewed and extended several times until we all get through the pandemic and people return to workFinancial Counselling Australia CEO Fiona Guthrie
For any loans taken out before July 2010, your eligibility for a hardship variation would depend on the size of the loan and when you took it out. It would also depend on which state you live in.
The good news is that a hardship variation won't be reflected in your credit report, although any late payments probably will.
ASIC provides a year-by-year breakdown of the hardship thresholds.
"Financial hardship arrangements do not have to be short term," says FCA's Fiona Guthrie. "The main requirement is that the person can reasonably repay. Repayment arrangement in the pandemic will need to be flexible and may need to be reviewed and extended several times until we all get through the pandemic and people return to work."