Coded vs Non-Coded Loans

In Australia, we have the National Consumer Credit Protection Act (NCCP Act) which is legislation designed to protect consumers and ensure ethical and professional standards in the finance industry. 

There now is a nationally consistent framework to legislate the way in which credit is regulated.

The NCCP Act applies to credit contracts entered into on or after 1 July 2010 where:

• The lender is in the business of providing credit
• A charge is made for providing the credit
• The debtor is a natural person or strata corporation

The credit is provided:

• For personal, domestic or household purposes, or
• To purchase, renovate or improve residential property for investment purposes, or to refinance credit previously provided for this purpose.

Under this legislation, loans are determined to be ‘Coded’ or ‘Non-Coded’. 

When is a loan considered a Coded Loan?

If a loan falls within the NCCP Act, it is deemed to be a Coded Loan. Because these loans are meant for personal use, they come with certain protections and regulations.

The NCCP Act requires lenders to adhere to responsible lending practices, which include assessing a borrower's ability to repay and providing clear disclosure of loan terms and conditions. 

Examples of coded loans include: 

• Personal Loans: Used for various personal expenses, such as medical bills, education, or holidays. 
• Home Loans: Mortgages for purchasing residential property. 
• Car Loans: Financing for the purchase of a vehicle.

Coded loans are generally provided by big banks, smaller banks, and non-banks collectively referred to as ‘traditional’ lenders.

What are Non-Coded Loans?

Non-coded loans, on the other hand, are intended for business or investment purposes. These loans are not covered under the NCCP Act, meaning they lack the consumer protections associated with coded loans. 

However, this can provide greater flexibility for business borrowers who need tailored financial solutions. Non-coded loans include: 

• Commercial Loans: Used for purchasing commercial real estate or funding business operations. 
• Development Loans: Financing for property development projects. 
• Business Loans: Capital for business expansion, inventory purchase, or working capital needs.

Note that Private Mortgages Australia only offers Non-Coded loans. It is therefore important to assess whether a loan is coded or non-coded before submitting an application.

How to determine a loan’s purpose

To determine whether a loan is deemed Coded or Non-coded under the NCCP Act, you need to establish who the borrower is and the purpose of the loan. You can be guided by the following:

1. Corporate Borrower = Non-Coded Loan
2. Individual Borrower:
   • Domestic purpose = Coded Loan
   • >50% Business Purpose = Non-Coded Loan

A Corporate Borrower may borrow funds under their company name for business purposes and this is automatically deemed to be a Non-Coded Loan.

When an Individual Borrower is looking for a loan, the process is a little more complicated. If they are borrowing funds for domestic purposes, the loan is deemed as Coded. However, if more than 50% of the funds are to be used for business purposes, such as buying into a business, purchasing a franchise, commercial property or other business reason, it is deemed to be a Non-Coded Loan.

The lender can obtain a “business purpose declaration” from the borrower to the effect that the purpose of the loan is for business purposes only, to prove that it can be deemed a Non-Coded Loan. The Lender also needs to make reasonable enquiries into the purpose which could be done by citing evidence of the use of funds. For example, requesting evidence of invoices and then paying those invoices at settlement to ensure the funds are used for the approved purpose.

In private lending, it is crucial to ensure that the loan is classified as Non-Coded under the terms of the NCCP Act. Understanding the difference between the two classifications is essential if a borrower wants to improve the chances of qualifying for a private business loan. 

Private Mortgages Australia specialises in non-coded loans, offering businesses flexible finance solutions. Whether it's for purchasing commercial property, funding a development project, or obtaining working capital, Private Mortgages Australia provides solutions that can be customised to meet specific business requirements.

For more information about private business loans or if you have a scenario you want to discuss, please call us at 1300 856 683 or contact us via our Contact Us page.