September 4th, 2017
As a mortgage broker, you can provide assistance to your clients to ensure that their credit facilities are meeting their current needs and objectives. Debt consolidation is a very helpful service which can help clients manage their money more effectively and potentially save on high-interest debts.
What is debt consolidation?
Debt consolidation is a term used to describe bringing all existing debts together into one new debt. It is often an option for clients who have many liabilities that they are struggling to manage. This could be because they find it hard keeping on top of the multiple repayments, they have debts with very high interest rates, or because they have just over extended themselves on what they can afford to repay.
Debt consolidation is typically achieved by taking out a personal loan and paying it back over a set term – however there are other ways to go about it, such as a home loan refinance for example. It is paramount that when you assist your client with any loan product, you have discussed the risks and costs involved. These considerations enable you to evidence that this option is not unsuitable, meets your client’s needs and objectives, and that they can repay the loan without substantial financial hardship. These are your obligations under NCCP.
Why would debt consolidation be an option?
Usually, debt consolidation is required to make it easier for the client to pay back their debts. However in some instances, the objective of a debt consolidation may be to reduce a client’s monthly financial liabilities to improve cash-flow, or to help them to qualify for a home loan.
Other reasons for debt consolidation may include:
Your compliance guide: Things you need to tell your client
When discussing any loan or credit facility with a client, you are obliged to discuss both the pros and the cons. For example:
It is important to make sure your client is fully aware that with debt consolidation, they are not solving the problem of debt, just easing the symptoms. You must advise your client that debt consolidation is designed to help them clear their debt and also what would happen if it is not used the way it is intended. This will enable your client to make an informed choice about their options.
We also recommend that you encourage your client to create a budget to ensure the debt consolidation measures will work effectively for them. You can find a great budgeting template on the ASIC MoneySmart website that could help.
Evidence is key.
Please ensure you are documenting the conversations you have with your client about consolidating their debt. If you are asked to evidence what discussion you had with your client, you will need to be able to provide detailed notes, emails and other correspondence to prove you have met your responsible lending obligations under NCCP.
Contact the Compliance Team with any questions.
If you have any questions about debt consolidation, the Compliance Team will be happy to help. Get in touch by clicking your help icon in Mercury or simply email us directly at firstname.lastname@example.org