Signing up for a home loan or credit card is a significant milestone for most Australians, but research has found many people are confused about how much it will cost...Making it more important than ever before to call us, your trusted Mortgage Advisor to make transparent the true costs of a mortgage.
A University of Queensland study looked into how well consumers understand disclosure documents for different types of loans and credit and store cards before signing up for them.
Study author and law lecturer Paul O'Shea says he was not expecting perfect results but was still surprised by the outcome.
"We knew there were unacceptably low levels of consumer comprehension of important features of consumer credit contract transactions when we started," he said.
"What we didn't know was how bad it was."
The government-commissioned research showed 94 per cent of people could not work out the total cost of credit for a home loan, including interest repayments, using existing disclosure documents.
Mr O'Shea says people with previous experience in applying for credit showed better comprehension levels than those with no experience.
But even having a history with credit did not always produce better results.
"Fifteen per cent of participants understood how long it would take to pay off their credit card limit if they only made the minimum monthly payments," he said.
"Only 10 per cent of participants could realistically estimate how much that would cost."
'Pot luck credit'
Nicole Rich, policy and campaigns director at the Consumer Action Law Centre, says if people do not understand what they are signing up for, they are probably not getting the credit product they most want.
"[It] sort of makes it pot luck whether you actually get the best deal that's available to you on that day or not," she said.
"We really need to make it easier for people to understand the most important features ... so people can make an informed decision."
The study was recently released to the public ahead of the Commonwealth takeover of consumer credit regulation from the states from July 1.
As part of reforms to credit regulation, the Government will be releasing a green paper on credit issues, such as pre-contractual disclosure information, for public consultation in the next couple of months.
'Less paperwork'
The main aim of the research project was to come up with a pre-contractual disclosure model that would be simpler to use and easier to understand.
Using feedback from study participants, researchers created a one-page document that contained vital credit information.
In the case of credit cards it included information about annual cash advance rates, fees and charges, interest-free periods and minimum repayments.
More comprehension tests were then carried out which showed there were higher comprehension levels when the simplified models were used.
Mr O'Shea says the revised format would make it easier for people to understand what credit providers are offering and give consumers "more effective choice".
Ms Rich says the credit industry should get on board to help simplify disclosure documents.
"The problem for consumers is it often doesn't actually suit the interests of industry to have clearer and simpler disclosure of information," she said.
"The more confusing it is, the harder it is for consumers to find their way in the market and the easier it is to charge consumers higher prices - because we can't really tell the difference anyway."
No argument
Ian Gilbert, policy director at the Australian Bankers Association, says there will be no argument from the banking industry about simplifying disclosure documents.
"The banks are not going to stand in the way of simpler, clearer and effective disclosure for consumers. That's in everybody's interests," he said.
Mr Gilbert says the amount of disclosure paperwork credit providers give to customers at the moment is necessary because of legislation.
"The law specifies that there's a range of disclosures that need to be made to consumers, not only in the contract but before they enter into the contract," he said.
"What's currently being disclosed is what is mandated under law. Failure to do so would attract a civil penalty."
But he says changing documents "wholesale" is expensive and banks would have to find a way to recoup the costs if changes were made to the regulation.
"How those costs are absorbed and dealt with by banks is going to be a decision for them individually," he said.
SOURCE: ABC News
For your next mortgage application, don't leap in blind! Call us on 1300 725 489 to ensure that the costs of a mortgage are fully disclosed to you prior to signing any forms!
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