Business use loans - no early exit fees?

17 May 2017

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Unlike ordinary secured car loans for consumer use, Business use loans fall outside the scope of the National Consumer Credit Protection (“NCCP”) Act. This means customers borrowing for their business are not protected by the same regulatory framework that governs the marketing and sale of consumer loans. This can make the business use loan market somewhat of a wild west when compared with the consumer market, but what does that mean for you?

This means that as well as the relaxed regulations around the marketing and sale of the loans, the lending criteria is also relaxed and some financiers even offer low or no doc loans for business customers. Meaning you don’t need to prove your income to get a loan, but that doenst mean there aren't pitfalls for buyers.

Due to these relaxed regulations, a lot of brokers, introducers, or lending institution staff, will outline that their commercial loan products have no early exit fee if you were to pay the loan out early and won’t elaborate on this further, because they don't have too. When really, there could be other fees or conditions that need to be fulfilled to qualify for a fee-free early exit. Because these products are not governed by the NCCP, this is not considered unscrupulous behaviour by the lender or agent, and is permitted. If the customer had instead asked “Will I save on all outstanding interest when I pay my loan out early and will there be any early exit fees?” This question would then have to be answered differently, as the staff member then could be lying to you, which of course isn’t permitted.

Most lenders on commercial products will calculate your ‘interest rebate’ on a method called a Rule of 78. Pretty much most commercial loans and lenders that provide these loans will not rebate 100% of the outstanding interest and this amount can be substantially more than then the small early exit fees on a consumer loans. So whilst you are being told that there are no early exit fees, to payout your business use loan early is actually costing you more than a consumer loan if it were to be paid out early, as all relevant information is not being disclosed as again the right question is not being asked.

As the loan falls outside the scope of the NCCP Act, it is not required to advise you of how the interest is calculated throughout the loan term and if you were to terminate your contract early, how much interest you would save. This is a good reason why some commercial loan products offer cheaper interest rates and no monthly account keeping fees, as the lender is protected in some sense if you were to pay the loan out early by withholding some of the interest rebate that you would have received if it were a consumer use loan.

Next time you are getting a Commercial loan from your normal provider, ask the question about the interest rebate and you may be surprised to learn that you are actually being penalised in some way and in fact although there is no early exit fee, they are not rebating all outstanding interest left owing at the time of payout.

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