Financial

GUEST BLOG: How using Afterpay and other 'buy now, pay later' schemes affect your mortgage application

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What does "Afterpay" really mean for me in the long run.

With the Royal Commission and tightening of lending policies, we are going to see a very different lending landscape in Australia.  Unfortunately a lot of people including our first home buyers are not aware of how all these new products where you buy now and pay later, may actually mean they will pay later by losing their opportunity to have the Australian dream of buying a home one day... I have invited Andrew Evans of Mortgage Guy to explain what buying products with "afterpay" really means for their credit rating....  I will be inviting our close working partner advisors to share their intel with our readers over the next couple of months.

Introduction written by Adriana Care, Managing Partner, Coutts


Ever seen that must-have-now item that you don’t have the cash for right now? What if it was four equal instalments? Interest free payment app, Afterpay[AE1] , is taking the retail space by storm because it allows shoppers to get what they want now and worry about paying for it later.

Afterpay has seen dramatic growth over the last few years with more and more retailers coming on board. With even Jetstar joining the party for domestic flights[AE2] , it’s getting easier than ever to buy now and pay later.

But what are the down sides? According to this article on ABC News, Afterpay made over $28 million in late fees [AE3] from when its customers miss a payment. Make sure you don’t contribute by paying on time.

However, now that you’ve got your eye set on that amazing home, Afterpay might have some unexpected impacts.


Your credit file

Everyone who applies for the ever-necessary home loan will have their credit file checked by the home loan lender they apply to. The lender will look for black marks such as defaults and more recently repayment information on your existing financial commitments[AE4] .

All this information is used to determine a credit score – a magic number that decides whether the lender will loan you money, or not.

Will Afterpay appear on your credit file and affect your credit score? Probably not, but it is certainly possible. Currently, Afterpay does not appear to do credit enquiries which means it shouldn’t affect your score every time you use the service.

However, the Afterpay T&C’s [AE5] do give them permission to put credit enquiries on your file and to report “negative activity … (including late payments, missed payments, defaults or chargebacks)” to the credit reporting agencies. If you end up behind on your payments you could find yourself in the credit score badlands. As a mortgage broker, I have seen loans declined purely based on having too many enquiries on their credit file.

The best thing you can do if you must use Afterpay is not over use the service and keep an eye on your credit file [AE6] which you can do for free, once per year.


Your expenses

The other potential impact from using Afterpay is on your living expenses. Living expenses is a huge focus [AE7] now and it’s all about ensuring lenders have an accurate idea of how much you’re spending of day to day costs plus of course, splurging on smashed avocado on toast[AE8] .

The home loan lenders are still figuring out how they handle Afterpay. They can’t treat it like a credit card because it only lasts four payments. Many have settled on including it in your living expenses. With most banks requiring bank statements on all accounts (and some up to 4 months!) they are going to see your Afterpay payments and want to take it into account. A heavy Afterpay user with lots of large payments (like for domestic flights) is going to have an undesired impact on their borrowing power.


What about how it looks

The other intangible downside is that it just doesn’t look great to a home loan credit officer. Some home loan credit assessors perceive Buy now, Pay later services with negative connotations. When you’re trying to buy that dream home the last thing you want is for that 75” flat screen that you Afterpay’d to cause a decline.


So, what should you do?

I have plenty of customers using Afterpay and still getting home loans. However, I have also seen extra focus put on deals with these payment services. A bad credit score is something to be avoided.

The key to everything is moderation. Here are my top tips for being able to get that house:

  1. Don’t be lured into purchasing something you can’t afford. Even if it has a payment plan.

  2. Only use the Buy now, Pay later services when you need to and ensure you can pay it off comfortably without incurring late fees. Or better, use a service I call Save now, Buy later – it’s free!

  3. If you’re in trouble, the worst thing you can do it ignore it. Be open and talk to the lender – you will have a very different conversation that if they have to chase you up. There are also financial counselors available to help[AE9] .

Article written by Andrew Evans, Broker for Mortgage Guy

If you are planning on buying or selling a home, we can assist with all your conveyancing needs. For information and advice on mortgages, our team can pass on your details to Andrew Evans.

Adriana Care
Managing Partner
adriana@couttslegal.com.au
1300 268 887

References:

 [AE1] https://www.afterpay.com/en-AU/how-it-works

 [AE2] https://www.jetstar.com/au/en/afterpay

 [AE3] https://www.abc.net.au/news/2018-08-24/afterpay-late-fees-24pc-income-asic-loophole-credit/10156902

 [AE4] https://www.canstar.com.au/credit-score/what-is-positive-credit-reporting/

 [AE5] https://www.afterpay.com/en-AU/terms-of-service

 [AE6] https://www.mycreditfile.com.au/products-services/my-credit-file

 [AE7] https://www.smh.com.au/business/banking-and-finance/apra-pressures-banks-over-customers-living-expenses-claims-20180530-p4ziet.html

 [AE8] https://www.news.com.au/finance/money/costs/avocado-toast-mortgages-have-gone-global/news-story/0e691bfafc89e2d1511a7cbdfd074e9c

 [AE9] https://www.financialcounsellingaustralia.org.au/Home

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

Minimising Bad Debts For Businesses

Minimising-Bad-Debts-For-Businesses.jpg

The decision for a business to trade on credit terms carries risks which need to be properly assessed and mitigated at the outset.

 

The use of an effective and up-to-date Credit Application form and Terms and Conditions (T&Cs) are critical to minimising the risk of bad debts - however, there are also other simple checks which may point to increased credit risks.

 

General Risk Factors

You should consider and assess the following issues before deciding whether to proceed with a credit transaction:

  • is the other party an existing customer of your business. If so, for how long?

  • how was the other party referred to you?

  • how long has the other party been trading? Is it a start-up or well established business? What is its payment history like? Has this deteriorated recently?

  • is the other party a trustee company?

  • is the other party domiciled in Australia or overseas? Where are its assets located? What are its assets?

  • what industry sector is the other party is in? Is this an industry which is trading poorly or in structural decline?

  • does the other party’s business have a stable revenue base - or does it generate revenue from being awarded irregular contracts?

  • what is the size of the transaction relative to the size of your business? If you do not receive payment will this threaten the viability of your business?

  • has the other party displayed recent adverse signs - for example the loss of key staff or adverse publicity?

 

Sourcing further information

 

More specific information on the other party can be sourced by:

  • obtaining credit reports from one of the leading credit agencies operating in Australia ie Equifax (formerly Veda Advantage): www.equifax.com.au, Experian: www.experian.com.au or Dun and Bradstreet (D&B): www.dnb.com.au;

  • an ASIC (Australian Securities and Investment Commission) search: www.asic.gov.au;

  • a PPSR (Personal Property Securities Register) search: www.ppsr.gov.au;

  • searching Court lists for current litigation or Court judgments:

    www.courts.justice.nsw.gov.au;

  • land title and lease searches (NSW Land Registry Services): www.nswlrs.com.au;

  • bankruptcy searches (for an individual): www.afsa.gov.au;

  • checking the other party’s web-site and social media sites (the absence of a web-site or recent social media activity could be a cause for concern);

  • online reviews (check if the reviews are recent and whether there is a pattern of adverse reviews);

  • speaking with trade referees and other existing customers and suppliers with recent trading experience with the other party.

 

Credit Application

Also essential to mitigating bad debts is having an effective and comprehensive Credit Application form which obtains as much information as possible in relation to:

  • the financial position of the other party including, where appropriate, the provision of copies of financial statements, management accounts and bank statements;

  • all current addresses, telephone numbers, email addresses and, where appropriate, photo identification of the other party and its director/s;

  • names of trade referees and their contact details.

 

Together with the Credit Application form should be your Terms and Conditions which set the legal framework for the transaction. T&Cs should be comprehensive and, where appropriate, include provision for:

  • directors guarantees;

  • security (including PPSR compliance);

  • suspension of supply and set-off clauses;

  • jurisdiction clauses.

It is highly recommended that your Credit Application and T&Cs be reviewed regularly by a lawyer to deal with changes in the law and changes in the nature of your business and/or the product or service being supplied.

Expert legal advice can also be provided to ensure that the T&Cs will withstand legal challenge under the new “unfair contract laws” - which since November 2016 can apply in relation to business-to-business standard form contracts.

Summary

The risk of bad debtors is ever-present - however, from our experience, the risk can be reduced by:

  • effective and targeted due diligence before entering into a credit transaction and throughout the trading relationship; and

  • an effective Credit Application and T&Cs.

Coutts has considerable experience in preparing Credit Applications and T&Cs for a range of clients across different industries and in recovering bad debts when they arise.

Please feel free to contact Daniel St George if you would like to discuss or if you require any assistance in relation to reducing your bad debt risks.

Daniel St George
Senior Associate
daniel@couttslegal.com.au
1300 268 887

This blog is merely general and non specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

Small business protection from unfair contracts

The Australian Consumer Laws are designed to protect an individual against unfair practices. Under the proposed Unfair Contracts, some of these protections will be extended to protect small businesses as well (who don’t fall within the definition of consumer). The unfair Contracts Act is designed to make it harder for a business to enforce certain standardized contracts, or at least certain clauses in those contracts, against a small business. The kinds of terms that will be in the firing line include:

  • Clauses that allow one party to increase the price without allowing the other party to then terminate the contract.
  • Clauses that allow a party to vary the terms of the contract without informing the other party and allowing them to then terminate the contract.
  • Clauses that allow one party but not the other to terminate

Will these protections apply to franchising? Yes, if the upfront price of the contract is either less than $100,000.00 or if the contract duration is 12 months or more, the upfront price is no more than $300,000.00. Given the vast majority of franchise agreements are presented or a ‘take it or leave it’ basis and often do not allow the individual or small to terminate the agreement before the term, there could be a flurry of activity as franchisors update their agreements. Other typically clauses in franchise agreements that allow the franchisor to buy back the franchised business at an unfair amount or to reduce the obligations they offer to provide are likely to be now enforceable.

This Act was passed in October 2015 by Parliament and is expected to come into effect by the end of 2017. If you use a standardised contract, such as terms and conditions, now is the time to review your contracts. If you find clauses that give you all the power and your customer- be they an individual or a small business- none, you might need to re-phase the clause or perhaps get rid of it completely. Ask yourself if that clause is necessary to do business with you and protect your legitimate interests. If you have been using a standard contract “borrowed” off another business or maybe downloaded from www.whoknowswheres.com, it’s a great time to chat to us about getting a contract, or, terms and conditions that complies with these new amendments and is tailor made to your industry and your business.

The amendments to the Unfair Contracts bill mean, if you are a small business you will soon have another string on your bow if you were to end up in a dispute over a contract.

For advice on your business contracts click here to contact Coutts.

Different Business Structures

If you are buying a business or starting a business, you will need to make a decision on the type of Business Structure you need.  Firstly you need to know what the different Business Structures are and what suits your business.

Sole trader

A sole trader is the simplest business structure you can have. It is easy to set up and easy to wind up. Many favour this structure as there is less formal paperwork required than other structures and you generally have complete control over your business. One major risk is that you are personally liable for any debts or liabilities of your person and this is a limitless liability. This means there is no distinction between your business property and your personal property. It can also be harder to sell a business as a sole trader as potential purchaser’s may find it hard to see value in the business once you have gone (a reasonable conclusion!). If you start as a sole trader it is easy to change structures, which many do as their business expands.

Partnership

Once the hallmark of an accountants practice or a firm of lawyers, partnerships are less common than they used to be. However, partnerships still have their place in the modern business world. It still suits 2 or more people who want operate a business together and want a more flexible structure. As with sole trader, liability and responsibility for debts of the business (even if the business has a separate name) is shared equally by the partners…if one partner disappears the other can be left with all of the debts. Partners can split profits as income and offer partnerships to high performing employees. Whilst not compulsory, any partnership should have a written agreement clearly setting out how the partners want the business to operate and what they will do if a dispute arises.

Company

Commonly a company is a Pty Ltd (a proprietary limited) company. A company is responsible for its own obligations and debts. Shareholders are not responsible for company debts. Directors of a company are only liable for company in a limited circumstances. A company has higher set up costs then partnerships and sole traders and has ongoing obligations and reporting requirements with ASIC. Some information regarding the company, such as its directors, shareholders and registered office is publically available.

Trust

Trusts can often offer the highest level of asset protection for an individual in business. Trusts can also be flexible in how they distribute income to beneficiaries so there can be some tax advantages. Details of trusts are not generally publically available and so offer more privacy then a company. However, they can be expensive to set up and have ongoing reporting requirements (so your accountant will love it!). The complex structures of trusts can make it harder to use loans and financing arrangements

Which structure suits me?

As shown above each structure has positive aspects and negative aspects. Different models suit different types of businesses. An accountant is the best person to advise on which structure best suits your business and we can prepare the necessary documents to put those structures in the place.

For any further advice or legal assistance on this issue, please contact us at Coutts on 1300 268 887.

Debt Collection Guideline

Revised Debt collection guideline released The ACCC and the Australian Securities and Investments Commission today released an updated version of their joint Debt collection guideline: for collectors and creditors publication.

The revised guideline aims assist creditors, collectors and debtors to understand their rights and obligations, and ensure that collection activity is undertaken in a way that is consistent with the Commonwealth consumer protection laws.

This publication has been updated to reflect new communication technologies developed since the 2005 version of the publication, including the use of social media platforms and auto-dialers, and significant changes to the law, such as the introduction of theAustralian Consumer Law in 2011, the National Consumer Credit Protection Act 2009and new privacy laws and principles.

For more information read theDebt collection guideline: for collectors and creditors publication or the full media release.