When it comes to obtaining finance from a private lender, it’s really important to understand the difference between coded and 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’. Private lenders must be aware of the difference between these classifications. So, what determines what is a Coded and Non-Coded loan?
If a loan falls within that Protection Act, it is deemed to be a Coded Loan. This simply means that the loan is to be used for domestic purposes only. Borrowers can use the loan to buy a car, to go on a holiday or for other similar domestic reasons. Coded loans are generally provided by big banks, smaller banks, and non-banks collectively referred to as ‘traditional’ lenders.
A non-coded loan is a loan that is used for business purposes. It is the Private lenders decision to be licensed or unlicensed depending on the types of borrowers they service. Private Mortgages Australia can only lend to business borrowers. It is therefore important to assess whether a loan is coded or non-coded.
Purpose of the Loan
To determine whether a lone is deemed Coded or Non-coded under the legislation, you need to establish who the borrower is and the purpose of the loan. You can be guided by the following:
- Corporate Borrower = Non-Coded Loan
- 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 siting evidence of the use of funds. For example, requesting evidence of an invoices and then paying that invoice at settlement to ensure the funds are used for the approved purpose.
In private lending, you must make sure the loan is going to be Non-Coded under the terms of the NCCP Act. It is therefore important that you understand the difference between the two classifications.
For further information about private loans for business projects, give us a call on 1300 856 683 or contact us via our Contact Us page.