Code of Responsible Borrowing and need of financial literacy

Code of Responsible Borrowing shows importance of financial literacy

The Federation of Family Budgeting Services has today launched a Code of Responsible Borrowing, which encourages people to understand their financial situation before making a decision to borrow money.

CEO Raewyn Fox says the Code of Responsible Borrowing includes simple steps to making a responsible borrowing decision.

“It’s important that people are in control of their borrowing decisions, and understand the flow-on effects,” Fox explains. “We feel that a potential borrower should run through a Code of Responsible Borrowing as a checklist before making a decision to borrow money.”

The Federation’s Code of Responsible Borrowing is in response to changes in legislation that come into force next month.

“The government has developed a Code of Responsible Lending, which is great. It’s a mechanism to stop irresponsible lending at its source, and the changes should be noticeable,” Fox says.

“This is an important change, but only comes at the transaction from one side; the lender. The borrower is on the other side of the equation, and borrowers have responsibilities too.”

Let’s take a look at the key responsibilities under each code.

Lenders: Must help borrowers and guarantors to make an informed decision

Borrowers: Should work out a budget to be sure they can afford the repayments, and be sure they know what they’re signing

Lenders: Must make reasonable enquiries

Borrowers: Should provide real information

Lenders: Must act reasonably and ethically

Borrowers: Should tell their creditors when unexpected life events make repayments difficult

Lenders: Must make sure their loans are not oppressive

Borrowers: Should make sure they can afford the repayments

These concepts are endorsed by Lyn McMorran, Executive Director of the Financial Services Federation. “Good financial decisions – by both the borrower and the lender – have better results for everyone. Our members are doing their best to make responsible lending decisions and it’s reassuring to think that borrowers are approaching the contract in the same good faith.”

Industry experts – from both sides – agree that the Code of Responsible Borrowing is an important component in improving financial literacy.

Clare Mataira from the Hamilton Budgeting Advisory Trust says “the Code of Responsible Borrowing suggests that there are ways to meet your needs other than borrowing, a sentiment our budgeting clients prove every day through their creativity and resourcefulness. There may well be other ways to solve a problem without money, and these are always worth exploring.”

Robert Antonio from the Porirua Budget Service says almost all of their clients have debt of some kind. “A few clients are trapped in contracts that should never have been agreed to – by either party. We absolutely support the Code of Responsible Borrowing to go alongside the Code of Responsible Lending, as they will help prevent these sorts of problems.”

Fox says the competing trends of resourcefulness and irresponsible lending are similar to those seen by the other 160 community budgeting services around the country, who are giving the Code of Responsible Borrowing in brochure form to their clients. “We don’t think the Code of Responsible Borrowing is a magic cure, but will contribute to the improvement of financial literacy.”

The Code of Responsible Borrowing even has the support of money lenders. Glen Todd is the CEO of Motor Trade Finances (MTF) and says using the Code of Responsible Borrowing as a checklist could be one more way their business makes sure their lending decision is sound. “We have obligations under the new credit contract legislation, and we want to be sure we’re lending in keeping with our own values as well,” Todd explains. “The Code of Responsible Borrowing is a perfect conversation starter for those private and confidential conversations we need to have to ensure our customers aren’t borrowing beyond their means.”

Home Direct plan to use the Code of Responsible Borrowing brochure in their ‘starter packs’ and Instant Finance are thinking about ways to incorporate the Code of Responsible Borrowing as part of their standard lending programme.

Fox says working with the lending industry makes sense as a technique to reach people before they make a borrowing decision. “It’s my hope that the Code of Responsible Borrowing is presented and considered before all borrowing decisions are made,” Fox says.

The Code of Responsible Borrowing is available for no cost from community budgeting services, or can be ordered from www.familybudgeting.org.nz. “If you’re thinking about taking out a loan,” Fox says, “we suggest you talk with someone independent. Find your nearest budgeting service on our website or by calling 0508 283 438.”

ENDS

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