So you’re applying for a home/business/personal loan. Did you know that when processing your application, your banker is bound to act based on the stated purpose of the funding?
This goes beyond whether you can afford the loan. There is very strict legislation around the approval of lending dependant on what the funds are to be used for. This often causes people a lot of confusion and frustration.
For example, you want a loan to start a business. You might think an easy way to access the funds you need would be to apply for an increase to your home loan and roll all your debt into one.
Bad news. Your banker can’t do that, even if you can easily afford the repayments. And it’s not because they want to sell you a more expensive business loan instead.
Consumer Lending v Commercial Lending
Consumer lending versus commercial lending is very different. Two of the main factors are that:
- consumer lending is tightly legislated under the National Consumer Credit Protection Act (NCCP) and the National Credit Code (NCC); and
- the risk profile of consumer lending is very different to that of business lending, and this impacts the regulated capital requirements the banks must meet.
In a nutshell, by providing a consumer lending product (a home loan for example) when the known purpose of the funds is a commercial one (to start a business), the bank:
- may be in breach of legislation;
- will not have met regulated capital holding requirements (for this loan); and
- has put itself at a legal disadvantage.
In a case where a customer is in default, the bank could potentially lose the case and be forced to give up the security it held against the loan if it were proved that the funds were approved inappropriately.
Home as Security
While you may not be able to use a home loan for business purposes, this should not be confused with using your home as security for a business loan. That is a very standard and often used scenario. Remember, it’s to do with the type of loan being approved. Home loan for business purposes = bad. Business loan secured by home as security = OK.
It’s a similar scenario in reverse, you can’t increase your business loan for the purposes of buying a home.
Even the industry you are in can make a difference when it comes to loan applications. There are certain industries, brothels are one example, that some banks won’t lend for based on internal policies for reputational reasons.
Given that consumer lending rates and fees are generally a lot cheaper than commercial interest rates, it could be considered a tempting option for bankers who are trying to compete on price to bend the rules and offer a consumer loan. However, very few bankers will do the dodgy because of the potential consequences for them personally. If a banker knowingly and willingly approved a home loan for someone to start a business they could get fired.
So, when applying for lending be sure to think about what the purpose of the funds is, and the restrictions that may accompany that type of loan.
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