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Law Current to: June 30, 2025

Specific rules for different credit contracts

Specific rules about small amount credit contracts (payday loans)

Credit providers that provide small amount credit contracts are subject to stricter rules than other types of personal loans. This includes caps on the amounts that they can charge.

Clients may be able to challenge a debt if these additional rules are not observed.

The caps are limited to the following:

  • a one-off establishment fee (of not more than 20% of the loan amount)
  • a monthly account keeping fee (of not more than 4% of the loan amount)
  • government fees and charges (if applicable)
  • default fees or charges (the credit provider cannot collect more than 200% of the amount of the loans if our client misses a payment or fails to pay back the loan); and
  • enforcement expenses (if our client defaults, these are the costs incurred by the credit provider going to court to recover the amount our client owes under the credit contract). 1

Providers of small amount credit contracts have additional obligations in relation to responsible lending and disclosure which are described in more detail below. These additional obligations are intended to further protect borrowers who are most vulnerable in terms of their lack of ability to repay debts.

There are also suitability assessment and income requirements for small amount credit contracts, a summary of which is included below. ASIC RG 209 sets these obligations out in greater detail.

If the client is a borrower under a small amount credit contract, then you can check to see if the credit provider has charged or is seeking to charge amounts exceeding the amounts which it is permitted to charge under these rules. Any provisions in respect of such amounts under the contract will be void. Any such amounts already paid by the client may be recovered from the credit provider.

Unsuitablity assessment

Before providing credit under a small amount credit contract, a credit provider must document their preliminary assessment that a small amount credit contract is not unsuitable for a consumer, together with their inquiries and the verification of information. 4

The contract must be assessed as unsuitable if:

  • at the time of the assessment, the consumer is a debtor under another small amount credit contract and is in default in payment of an amount under that contract; or
  • in the 90-day period before the assessment, the consumer has been a debtor under two or more small amount credit contracts; or
  • a required amount of credit is to be provided under multiple small amount credit contracts or medium amount credit contracts, and the cost to the consumer is higher than the maximum charge payable under a single credit contract. 5
Cap on repayment amount

The repayment amount plus any other amounts due during the repayment period must not exceed 10% of the available income the consumer is reasonably expected to receive during the repayment period. 6

Reasonable enquiries

Lenders proposing to enter into a small amount credit contract must obtain and review information about each transaction on a prospective borrower’s bank statements, and the balances of the account for the previous 90 days, even if the borrower’s income is paid into a joint account. 7

Prohibition on balloon payments

There is a prohibition on balloon payments at the end of the loan. That is, there is a requirement that the repayment amounts and intervals are equal and that the loan is fully repaid by the end. 8

Paying off loan early

A consumer who pays off their loan early is not liable to pay any further monthly fees for the remaining loan term. 9

The ASIC MoneySmart website provides further guidance and warnings on payday loans. If your customer is in financial distress, you should have a discussion about why a small amount credit contract may not be the best option for them. You may also refer them to ASIC’s payday loan calculator.

Case studies – small amount credit contracts (as reviewed by ASIC)

Chris

Chris applied for a small amount credit contract in the amount of $1,400. He provided the lender with his income and expense information along with his current bank statements. As part of the application, Chris noted that he has four children and is married. The only income that Chris’ wife, Betty, receives is a Centrelink payment, as shown in the bank statement. The lender assumed that Chris and Betty split the expenses evenly as they both have an income.

The lender approved the loan as it appeared that Chris had sufficient available income to meet the repayments when a lower amount was considered as being required for outgoings. The loan fell into default immediately. If the lender had contacted Betty to confirm whether the living expenses were evenly split, it would have become clear that Betty had loans of her own to repay, which used most of her income. Because of this, all of the household expenses needed to be met from Chris’ income and it was not reasonable to only have regard to half of the household outgoings.

Sophie

Sophie applied for a small loan and was asked by the lender whether she is, or has recently been, a debtor under any other small amount credit contracts. Sophie advised that, in the last month, she has had two other small amount credit contracts. In this case, there was a presumption that Sophie would only be able to comply with obligations to repay the new loan that was being applied for with substantial hardship. Accordingly, this loan must have been assessed as unsuitable, unless the lender was otherwise able to prove that there would not be substantial hardship.

Further inquiries about the purpose of the previous loans indicated that the previous small loans had been used to meet other financial commitments or expenses, such as rent or repayments on another loan, indicating potential financial difficulty. In these circumstances, it is unlikely that the lender would have been able to disprove the initial presumption.

However, if the further inquiries showed that the previous loans were used to pay for a couple of unexpected expenses, and that the loans were both repaid with no defaults (confirmed by Sophie’s credit history report and account statements), the lender may have been able to prove that Sophie would be able to meet her repayment obligations without substantial hardship, despite the initial presumption.

Daniel

Daniel entered into a small amount credit contract to pay for a one-off expense which arose for which he needed urgent funds. ASIC reviewed the loan documentation and found that the credit provider had breached consumer credit protection laws in relation to small amount credit contracts by:

  • assessing Daniel as suitable for the small amount credit contract when he had been a debtor under two or more small amount credit contracts in the 90-day period before the assessment;
  • charging Daniel prohibited fees under the small amount credit contract such as direct debit fees when using certain credit cards and fees to alter direct debit arrangements;
  • charging Daniel a monthly account keeping fee which exceeded 4% of the loan amount; and
  • imposing a final “balloon payment” at the end of the loan period (despite the fact that all repayments leading up were in equal amounts and dispersed at regular intervals).

ASIC contacted the lender and challenged the suitability assessment as well as the fees that it was not legally entitled to charge. The lender agreed to waive all debt owing.

Special rules about medium amount credit contracts

Credit providers that provide medium amount credit contracts are also subject to caps on the amounts that they can charge.

These are limited to the following:

  • a one-off establishment fee of $400; 10
  • interest up to 48% per year (note that this is the standard for all amount credit contracts with the exception of small amount credit contracts); 11
  • default fees or charges; and
  • enforcement expenses (if our client defaults, these are the costs incurred by the credit provider going to court to recover the amount our client owes under the credit contract).

There are also suitability requirements for medium amount credit contracts. A credit contract must be assessed as unsuitable if the consumer’s requirements and objectives are to receive a certain amount of credit, which could be provided through one credit contract, but the credit provider offers an arrangement to provide that amount through multiple medium amount credit contracts or a combination of small amount and medium amount credit contracts, that would be more expensive for the consumer. 2

Specific rules about credit cards

Credit providers must provide a ‘Key Facts Sheet’ to a client, together with an application for a credit card contract. A Key Facts Sheet must contain certain information, including the minimum credit limit, minimum repayments, interest on purchases and cash advances, the annual fee and late payment fee.

A credit provider must not:

  • invite a client to make a credit limit increase in relation to a credit contract; or
  • enter into a credit card contract if the client is not entitled to a credit limit reduction under the contract.

A client will be entitled to reduce the credit limit where:

  • for a contract that does not provide for a minimum credit limit—the client is entitled under the contract to reduce the credit limit of the contract to any amount (including nil); or
  • for a contract that provides for a minimum credit limit—the client is entitled under the contract to reduce the credit limit of the contract to any amount that equals, or exceeds, the minimum credit limit.

A credit provider under a credit card contract must notify the client if they become aware that the client has used a credit card to obtain cash, goods or services in excess of the credit limit for the contract.

If a credit card is used in excess of the credit limit, the credit provider must not impose fees or charges, or a higher interest rate, unless:

  • the credit provider has obtained express consent from the client covering the imposition of the fees or charges, or the higher interest rate; and
  • the consent has not been withdrawn.

A credit provider must not enter into, or offer to enter into, a credit card contract if the client would not have a right to terminate the credit contract. Nor can a credit provider suggest that a client remain in a credit card contract. The client must have the ability to terminate a credit contract online (i.e. on the credit provider’s website).

Footnotes

  1. Also defined by section 204(1) of the NCC.
  2. NCC s 169; where the consumer has a right/option to buy the goods, it will be considered a sale of goods by instalments and not a consumer lease. In effect this means it is a normal loan and the usual provisions of the NCCP Act apply.
  3. NCC s 171
  4. NCCP Act s 124C.
  5. NCCP Regulations 2010 s 28LCF.
  6. NCCP Regulations s 28LCA.
  7. NCCP Act ss 117(1A) and 130(1A)).
  8. NCCP Act 2009 s 133CD.
  9. NCC s 31C.
  10. NCC s 32B.
  11. NCC s 32A.
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