What Does an “Unsuitable Credit Contract” Mean

Have you been told that a loan may be unsuitable for you, or wondered why we ask detailed questions about your income, expenses and reason for borrowing?

An unsuitable credit contract is a loan or other regulated credit contract that is likely to be unaffordable without causing substantial hardship or that does not meet your requirements and objectives.

Under Australia’s responsible lending laws, a credit provider must not enter into a regulated consumer credit contract if the contract is unsuitable for you. Credit assistance providers, such as some brokers, must also avoid suggesting or helping you apply for an unsuitable contract.

That does not mean a particular loan is automatically unsuitable for everyone. The assessment depends on your circumstances, the proposed repayments and what you need the credit for.

At Sunshine Loans, we believe it is important that you understand how this assessment works and why responsible lending questions form part of the application process.

What Is an Unsuitable Credit Contract?

The term “unsuitable credit contract” has a specific meaning under the responsible lending provisions of the National Consumer Credit Protection Act 2009.

A credit contract must generally be assessed as unsuitable when it is likely that:

• You will be unable to meet your financial obligations under the contract.
• You could only meet those obligations with substantial hardship.
• The contract will not meet your requirements or objectives.
• Other circumstances prescribed by the regulations apply.

Credit providers are required to assess a proposed contract before entering into it or increasing its credit limit.

In plain English, the assessment comes down to two important questions:

1. Can you afford the repayments without being placed under substantial financial pressure?
2. Does the proposed credit product reasonably match what you need it to do?

If the answer to either question is no, the contract may be unsuitable.

What Does “Substantial Hardship” Mean?

Substantial hardship is more serious than having to make minor adjustments to discretionary spending.

It may arise when meeting the proposed repayments would leave you unable to adequately cover essential expenses such as housing, food, utilities, transport or necessary medical costs.

There is no single dollar amount that automatically determines substantial hardship for everyone. Your individual financial circumstances need to be considered.

For example, two people may earn the same income but have very different:

• Rent or mortgage commitments.
• Numbers of dependants.
• Existing debts.
• Transport expenses.
• Medical costs.
• Available savings.
• Regular household expenses.

A repayment that may be manageable for one person could place another person under substantial hardship.

The legislation also contains specific presumptions for some circumstances. For example, if you could only meet your obligations by selling your principal place of residence, substantial hardship is generally presumed unless the contrary is established.

A Loan Can Be Unsuitable Even When You Could Technically Repay It

Affordability is not the only part of the suitability test.

A contract may also be unsuitable if it does not meet your stated requirements or objectives.

For example, a product may not meet your needs when:

• The available loan amount is not enough for the expense you identified.
• The repayment term is inconsistent with what you require.
• An important product feature you asked for is unavailable.
• The contract operates differently from the type of credit you said you needed.
• The product cannot reasonably be used for your intended personal purpose.

This is one reason we may ask what you intend to use the funds for, alongside questions about your income, expenses and existing financial commitments.

How Do We Assess Whether a Contract Is Unsuitable?

Responsible lending involves more than checking whether you receive an income.

As a credit provider, we are required to make reasonable inquiries about your financial situation, requirements and objectives. We must also take reasonable steps to verify your financial situation and assess whether the proposed contract would be unsuitable for you.

The extent of those inquiries and verification steps can depend on the circumstances, including the type and amount of credit and its potential effect on you.

Information considered during a credit assessment may include:

• Your regular and reliable income.
• Your essential living expenses.
• Existing loans, credit cards and other liabilities.
• The proposed repayment amount and frequency.
• Your stated reason for borrowing.
• Relevant information shown in financial records.
• Whether you appear able to make the repayments without substantial hardship.

We may use bank statements, income records or other appropriate information to verify details supplied with your application.

It is important to give us complete and accurate information. Leaving out expenses, debts or other relevant commitments can make it harder for us to assess your actual financial position accurately.

Does “Not Unsuitable” Mean the Loan Is Your Best Option?

No.

Responsible lending legislation generally expresses the assessment in terms of whether a credit contract is “not unsuitable”. That is not the same as saying a loan is necessarily the best option available to you.

A “not unsuitable” assessment does not necessarily mean:

• The loan is the cheapest product available.
• Borrowing is better than using another option.
• You should take out the loan.
• Your application is guaranteed to be approved.
• Repayments will remain affordable if your circumstances change.
• The same product will be appropriate for everyone in a similar situation.

You should still review the interest, fees, repayment schedule and total amount payable before making a decision.

It may also be worth comparing borrowing with alternatives such as using available savings, negotiating a payment arrangement or delaying a non-essential expense.

Examples of When a Credit Contract Could Be Unsuitable

The following examples are fictional and illustrate general responsible lending principles only. An actual assessment depends on the relevant circumstances of the individual application.

Example 1: Repayments Would Affect Essential Expenses

Sam applies for a personal loan to cover an unexpected car repair.

After Sam’s income, rent, household expenses and existing debts are verified, the proposed repayments appear likely to leave too little money available for groceries and electricity.

Even though Sam earns a regular income, the contract could be unsuitable because meeting the repayments may involve substantial hardship.

Example 2: The Contract Does Not Meet the Borrower’s Objective

Alex explains that they need a particular amount for a necessary personal expense.

The product being considered cannot provide enough to meet that expense, but Alex would still need to pay interest and fees on the amount borrowed.

The contract could be unsuitable because it may not meet Alex’s stated requirements or objective.

Example 3: The Contract May Be Assessed as Not Unsuitable

Taylor needs funds for a specific, one-off personal expense.

Taylor has regular, verifiable income and appears to have sufficient room in their budget after essential expenses and existing commitments.

The proposed amount and repayment schedule align with Taylor’s stated requirements and appear affordable based on the information assessed.

The contract may therefore be assessed as not unsuitable. However, that does not guarantee approval or mean borrowing is necessarily Taylor’s best available option.

Does a Declined Application Mean Every Loan Is Unsuitable?

Not necessarily.

We may decline an application because the proposed contract is unsuitable, but there can also be other reasons for a decline. These may include our eligibility requirements, incomplete or unverifiable information, or other factors considered as part of our credit assessment.

A declined application does not automatically mean every form of credit would be unsuitable for you.

It also does not mean immediately applying to several other lenders is necessarily the best response.

Before submitting another application, you may want to:

• Review the reason provided for the decision.
• Check that the information in your application was accurate.
• Review your current budget and repayment capacity.
• Consider whether a lower-cost alternative is available.
• Be cautious about making multiple credit applications within a short period.
• Speak with a financial counsellor if existing debts are becoming difficult to manage.

Moneysmart explains that a lender must decline a loan when its assessment indicates that you will not be able to make the repayments or the credit could cause hardship, even if you personally believe you could manage the repayments.

Can You Ask for a Copy of Our Assessment?

When you enter into a regulated credit contract with us, you can generally ask us for a free written copy of our assessment that the contract was not unsuitable.

You can request a copy within seven years of entering into the credit contract.

Our Credit Guide provides more information about the applicable timeframes. For example:

• If you request the assessment after entering into the contract but within two years of it starting, we generally need to provide the written assessment within seven business days.
• If you request it later, but within seven years, the general timeframe is 21 business days.

A copy of the assessment may help you understand:

• The information considered during the assessment.
• How your financial situation was assessed.
• The requirements and objectives recorded.
• Why the proposed repayments were considered manageable.

This may be particularly useful if you believe important expenses were overlooked or information used in the assessment was incorrect.

What Can You Do if You Believe Your Loan Was Unsuitable?

If you believe a credit contract you entered into with us was unsuitable, start by gathering relevant documents.

These may include your credit contract, application information, bank statements, repayment history and any correspondence relating to your application or loan.

1. Contact Us

Let us know why you believe the contract was unsuitable and identify any information that you think may have been incorrect, incomplete or overlooked.

You can ask us for:

• A copy of our responsible lending assessment, where available.
• Information about our internal dispute resolution process.
• An explanation of the information used during the assessment.

It is a good idea to keep copies of relevant emails, letters and notes from telephone conversations.

2. Make a Formal Complaint

If your concern is not resolved informally, you can make a complaint through our internal dispute resolution process.

You can find our current complaints process and contact information in our Credit Guide.

3. Contact AFCA

If you are unable to resolve the complaint directly with us, you may be able to lodge a complaint with the Australian Financial Complaints Authority, commonly known as AFCA.

AFCA provides a free and independent external dispute resolution service for eligible complaints about financial firms.

4. Get Independent Support

A financial counsellor can help you understand your options, communicate with creditors and address financial hardship or problem debt.

Financial counselling is free, confidential and independent.

You can contact the National Debt Helpline on 1800 007 007 for assistance from a financial counsellor.

How We Approach Responsible Lending

We are an Australian credit provider offering unsecured Medium Amount Credit Contracts. Our loans are not Small Amount Credit Contracts and are not traditional payday loans.

Our current product features include:

Every application is subject to our eligibility requirements, an individual assessment and approval. Meeting our minimum eligibility requirements does not guarantee that we will approve your application.

Before applying, you should review our current loan eligibility requirements and loan costs and fees. You can also find more general information about our product in our frequently asked questions.

A short-term credit product should only be considered for a specific expense when you can make the repayments without financial hardship.

You should not rely on borrowing as a substitute for regular income or repeatedly use credit to cover ordinary ongoing living expenses.

Alternatives to Taking Out a Loan

Before borrowing, consider whether another option could address the expense at a lower cost or with less financial pressure.

Depending on your circumstances, alternatives could include:

• Using available savings.
• Asking the service provider about a payment plan.
• Requesting additional time to pay.
• Checking whether hardship support is available.
• Delaying a non-essential purchase.
• Reviewing your budget for temporary savings.
• Comparing other suitable credit options.
• Seeking help from a financial counsellor.

Taking some time to consider the alternatives can be an important part of making a responsible borrowing decision.

You should consider what you can realistically afford to repay and how a change in your circumstances could affect that amount.

Frequently Asked Questions

Is an Unsuitable Credit Contract Illegal?

Australian credit licensees are prohibited from entering into unsuitable regulated consumer credit contracts under the applicable responsible lending provisions. Credit assistance providers are also subject to restrictions on suggesting or assisting with unsuitable credit.

Whether a legal breach has occurred in a particular case depends on the circumstances.

If your concern relates to a contract with us, you can raise it through our complaints process. You may also be able to take an unresolved eligible complaint to AFCA or seek independent legal advice.

Is a Loan Automatically Unsuitable if You Have a Low Income?

No. Your income is only one part of the assessment.

We also need to consider relevant expenses, existing commitments, the proposed repayments, your purpose for seeking credit and other relevant circumstances.

However, a contract may be unsuitable if you cannot meet the repayments without substantial hardship.

Is a Loan Unsuitable When the Interest Rate Is High?

Not automatically.

Interest and fees affect your repayments and total cost, so they are relevant when considering affordability.

However, the responsible lending suitability test also considers whether you can meet your financial obligations without substantial hardship and whether the contract meets your requirements and objectives.

This does not mean cost is unimportant. You should always understand the interest, fees and total repayments before deciding whether a loan is appropriate for you.

Can You Accept a Loan After We Decide It Is Unsuitable?

No. If we assess a regulated credit contract as unsuitable for you, we must not enter into that contract with you.

Your willingness to accept the financial risk does not remove our responsible lending obligations.

Does an Unsuitable Assessment Affect Your Credit Score?

A suitability assessment is not the same as a credit score.

However, a credit application may involve other credit-related processes, and information about credit applications can appear on your credit report depending on the circumstances.

What Should You Do if Repayments Are Already Causing Hardship?

Contact us as early as possible and ask about financial hardship assistance.

You may also wish to speak with a free financial counsellor through the National Debt Helpline on 1800 007 007.

Taking out another loan simply to meet repayments that are already unaffordable can increase financial pressure and contribute to a cycle of debt.

Understand the Costs Before Deciding

An unsuitable credit contract is generally one that is likely to leave you unable to meet your financial obligations without substantial hardship or one that does not meet your requirements and objectives.

Responsible lending assessments are designed to reduce the risk of people entering regulated credit arrangements that do not suit their circumstances.

However, an assessment that a contract is not unsuitable does not replace your own consideration of the costs, risks and alternatives.

Before considering one of our loans, review our current eligibility requirements, understand our interest, fees and repayment terms, and consider whether the repayments would be manageable alongside your essential expenses.

If you believe our loan may be appropriate for a specific, one-off personal expense, you can review our eligibility requirements before deciding whether to apply. Borrow only what you need and consider available alternatives before taking on credit.

The information provided in this blog is for general informational purposes only and does not constitute financial advice. It is not tailored to the specific circumstances of any individual. Before acting on the information, you should consider whether it is appropriate for you, having regard to your objectives, financial situation and needs.