What counts as a small amount loan
The Act calls it a small amount credit contract and sets out a test. A loan is one only if every line below is true.
| Part of the test | What it requires |
|---|---|
| Kind of contract | Not a continuing credit contract and not a low cost credit contract |
| Lender | Not an ADI (the Act takes that term from the Banking Act 1959) |
| Credit limit | $2,000 or less, unless the regulations prescribe another amount |
| Term | At least 16 days and no longer than 1 year |
| Security | Unsecured, now and later |
| Anything else | Any further requirement the regulations prescribe |
Loans of $2,000 or less that run 15 days or less are a separate category, short-term credit contracts, and a licensed lender must not enter into one at all. The regulations allow the establishment fee and the first monthly fee to be added on top of the $2,000 limit, which could take a credit limit to $2,480, but they note that no more than $2,000 would reach the borrower.
The fees the law allows
Section 31A of the National Credit Code lets a small amount loan carry four kinds of fee and no others:
- An establishment fee of at most 20% of the adjusted credit amount, which the Code defines as the first amount of credit provided under the contract.
- A monthly fee of at most 4% of that same amount, payable monthly from the day the contract starts.
- A fee if a payment is missed, payable on default.
- Government fees, charges or duties that relate to the contract.
No establishment fee is allowed at all if any of the new loan goes to refinance another small amount loan. And after a default, the lender must not recover more than twice the adjusted credit amount in total, whether through repayments or otherwise. Enforcement expenses sit outside that limit.
Worked example: the most a lender could charge
A $600 loan over 6 months, where $600 is the first amount of credit provided. These are the ceilings the Code sets, worked out here, not the price of any real loan.
- Amount lent
- $600
- Establishment fee, at most 20% of $600
- $120
- Monthly fee, at most 4% of $600 ($24), six times
- $144
- Most that could be repaid without a default, before any government fees
- $864
- Ceiling on what can be recovered after a default (twice $600, enforcement expenses aside)
- $1,200
The 10% repayment limit
A regulation made under section 133CC of the Act limits how much of a borrower’s income the repayments can take. In each repayment period, the repayment plus anything due in that period on other small amount loans must come to 10% or less of the borrower’s available income for that period. Available income means income less the tax withheld under the PAYG withholding rules.
Worked example: the 10% limit
Someone paid fortnightly, with repayments due fortnightly, whose income after PAYG withholding is $1,400 a fortnight. The figures are illustrative.
- Available income in the fortnight
- $1,400
- 10% of it
- $140
- Most that all their small amount loan repayments in that fortnight can add up to
- $140
If a lender enters into a loan that breaks this limit, the borrower is not liable for the establishment, monthly, default or government fees on it, and can recover any of those fees already paid.
Equal payments, and no cold offers
Section 133CD of the Act requires the repayments to be equal and evenly spaced. The last payment may be up to 5% smaller than the others, and the gap before the first payment can be no more than twice the gap between the first and second.
Section 133CF stops a licensed lender from making an unrequested offer of a small amount loan, or an invitation to apply for one, to someone who has had or applied for one before, with that lender or, where the lender ought reasonably to know of it, with another. If the lender breaks this and the borrower takes out a loan with it within 30 days, the borrower is not liable for the fees on that loan and can recover any already paid.
Lending responsibly
Legal Aid NSW notes that every lender must lend responsibly, which means checking a person can afford to repay before agreeing to lend. Moneysmart adds that a licensed payday lender cannot lend if it thinks the borrower will not be able to repay, or that repaying could cause them substantial hardship.
Moneysmart lists No Interest Loans (ticket 04) and Centrelink advance payments (ticket 05) among other ways to get money quickly.