Small Amount Credit Contracts (SACCs) are a relatively new type of lending product that was born out of legislation banning traditional payday loans.
However, most lenders still view these products as payday loans even if they are not categorised as such under Australian law.
Frequent use of these products will heighten your risk profile in the eyes of a lender when applying for a car loan.
In this article, we’ll discuss the true impact of SACC loans on your credit file and how to prepare for a car loan application in the future.
In This Post:
Payday Loan in Australia Today
Traditional Payday Loans
Pre-2013, a payday loan was typically a small unsecured loan to be repaid within a short period of time (usually a week or two), and in return, the lender would charge a very high fee or interest rate on the loan.
These charges were uncapped and it was not unusual to see eye-watering fees charged relative to the borrowed amount.
For example, you borrow $300 for an emergency expense and are required to repay the $300 + $100 in interest and fees a week later.
The excessive cost can lead to people needing to borrow again to repay the original payday loan, and ending up in an endless debt cycle that only gets worse over time.
New Payday Loans (SACCs)
The SACC legislation was introduced to provide guardrails for lenders so that repayment structures and fees were made fairer for the consumer.
However, they are still expensive loans even with the following fee caps in place:
- 20% establishment fee.
- 4% interest per month.
A SACC loan must also have a repayment term exceeding 16 days but no more than 12 months. This ensured repayments were spread out and manageable for the borrower – avoiding the need to borrow again elsewhere to make their repayments.
While this is a better outcome for consumers overall, it is still an expensive product to engage with and use of these loans is a sign that your household budget is under pressure.
Why Use SACC Products
People turn to SACCs to fill the need for short-term cash, often in response to an unexpected medical bill, car repairs, or other one-off expenses.
It can be a useful tool for those who have had credit problems in the past and cannot access a personal loan at a lower interest rate.
However, regular use is a red flag that lenders will pay attention to when assessing you for a car loan.
How SACCs Affect Your Credit
Every time you apply for a SACC loan there is a mark left on your credit file that will be visible to other lenders for up to five years. Regardless of whether you are approved for the loan or not.
This is potentially a detractor for your credit score and must be carefully managed if you are trying to get a new car loan.
Your Credit File
While payday lending applications will be visible to lenders for up to five years, each lender will have a different policy on how this affects your loan eligibility.
Some lenders will overlook SACC borrowing if no applications have been made in over 24 months.
Others will tolerate a limited number of SACC applications in the past 24 months, but if it is more than 2-3 then your options will be limited.
If you have used SACC loans in the past six months then you may be ineligible with all lenders.
These policies are always changing and you should speak with one of our expert brokers so they can full assess what car loan options are available to you today.
Car Loan Application Process
Lenders will scrutinise your credit history and bank statements as part of the application process to assess your spending habits and financial health as a way to manage risk.
What you may not know is that lenders are obligated by law not to lend to anyone who may be at risk of “substantial hardship”.
Regular use of payday lending services indicates you may not be managing your household budget effectively and the risk of hardship is high, and approving a loan could be a breach of the law.
Loan Serviceability
The higher cost and interest rate associated with a SACC loan may require a substantial repayment to ensure you are paying off the balance.
If you do not have sufficient income to support these repayments AND the car loan you are applying for then a lender cannot approve your loan.
If you are approved, it may be for a lower amount than you could otherwise afford if you had repaid your SACC loans in full.
Potentially missing out on your dream car in the process!
Loan Eligibility
As discussed earlier, most lenders have hard rules on the regular use of payday lending products. It is a risk they will not consider due to the laws around financial hardship.
So if you have a pattern of use you may be ineligible for a car loan, and your application will not even be assessed.
You will be knocked out without any consideration of whether you can service the loan repayments effectively or not.
If I Have Used SACC Loans, What Now?
Speak to a Broker Today
If you’ve used payday loans in the last few years then consulting a finance broker can help.
Our expert brokers can provide an honest assessment of your position and guide you through some steps you can take to improve your situation.
Any future application will be about financial discipline and timing.
How to Strengthen Your Loan Application
If you have been a heavy user of SACC products then you need to stop for a reasonable amount of time prior to seeking more credit.
If this is too difficult to do from a budget point of view then you are not ready for an additional car loan anyway.
You may also be experiencing financial hardship and it may be worth contacting your lender to discuss your options if you are struggling to make your payments.
Avoid Substitute Forms of Credit
There are other products available that may be cheaper but will create a similar problem in terms of your creditworthiness.
Wage Advance products have become popular but frequent use is also a red flag in a car loan application, so tread carefully.
Buy Now, Pay Later services have similar implications if you are a chronic user of these services.
Common Mistakes to Avoid
Using SACC Loans as a Quick Fix Too Often
Regardless of your intention to apply for a car loan, relying on SACC loans to cover regular expenses can trap you in a cycle of dependency that will only harm you over the long term.
These services are expensive and the impact on your credit eligibility is real.
Plan for Annual Expenses
Keep a written record of all of your expenses that come up infrequently. Open a separate bank account and set up an automatic deduction into that account each pay cycle.
Even if you put away $20 a week, that is over a thousand dollars that you will have each year to pay your insurance bill or school fees.
Save for Emergency Expenses
This is easier said than done, but even a small amount put away regularly can help when an emergency hits.
No matter how hard this is, resorting to short-term lending will place much more pressure on your finances. $10 a week now can save you hundreds of wasted dollars later.
Considering Overall Financial Health
Short-term fixes shouldn’t come at the expense of long-term stability.
Focus on creating a budget that supports your goals and reduces the need for wage advances. The amount of stress this will save you cannot be underestimated.
Building financial discipline is a muscle that develops over time.
Conclusion
Payday loans can be a helpful tool of last resort to deal with a one-off emergency. However, if you are relying on these services just to get by then this is a symptom of a greater issue and you should seek assistance.
Occasional use may limit your auto financing options but you should still be able to secure a loan if placed with the right lender.
So before you submit a car loan application get in touch with our brokers so we can help you find the best chance of a loan approval.
