What you need to know about: Bond Loans

Leo Patterson Ross , published on 01/11/2019

You've found a new place to move to after getting a no grounds notice and you're pretty confident that you'll get your bond back on the current place. But you've been stung by unfounded claims from agents before and you're a bit short on cash since knocking back a couple of shifts to go to inspections. You can't hit up Mum and Dad again to spot you again so soon - and you saw advertisements for bond loans on a few of the ads. Are they a good idea?

Bond loans have been available for some time from a number of providers, and we've kept a watchful eye on them. They and other bond alternatives have sprung up largely because of a flaw in the process of moving - you have to pay your new bond before you get your old bond back. This lag is a well known problem for people who rent their home and one former Minister Matt Kean acted to correct with transferable bonds. However this solution or an alternative hasn't yet been implemented at the Rental Bond Board. They also exist because the bond is just too damn high - and much higher than it needs to be, given only 10% of bonds in a year are claimed in full.

Bond loans are a form of personal loan. In general, the money is given directly to you to use for your bond and lodge with the Rental Bond Board. Remember that nowadays in NSW, your landlord or agent has to give you the option of lodging your bond online directly with the Rental Bond Board. Some loans can be used for essentially anything you like, whether bonds or moving costs. But for today we'll just look at the bond itself. In general, there are two types advertised. Some are with an interest charge, and some without. The loans without interest rely on the fees associated to perform the same role. Often, they end up costing you a similar amount. Loan providers are covered by some rules - check out ASIC for more on the rules around small loans. You can also go to the Financial Rights Legal Service Self-help Centre for their info that can save you a lot of hassle down the line.

Rent.com.au is one of the largest rental listings sites in Australia and uses a loan company called Fair Go Finance for bond loans which are branded as rentbond. Recently rent.com.au changed this bond loan offering to be interest and fee free for 21 days, so that if you do pay off the loan within 21 days it will have cost you nothing but some time and energy. Technically it is also not quite fee-free; you still pay an establishment fee and then get a refund on that fee based on how much of the loan you pay back within the 21 days. After 21 days it reverts to a 'regular' bond loan. They are a business so they aren't doing this for no reason - we expect this acts as something of a loss leader into some of their other products, and drives traffic to their site. It seems like a pretty good deal, but here's a few things we think you should consider before jumping in.

Do you have any other alternatives?

rentbond is open to people earning more than $500 per week and not receiving only Centrelink benefits. Most bond loan providers have similar restrictions (or significantly higher costs). So there are quite a lot of people who might be considering using a bond loan like this but who have other free options. Even if you can call on family or friends, that can get pretty complicated.

People eligible for social housing are generally entitled to 3 weeks worth of a Rentstart Bond Loan from the Department of Communities and Justice. The loan is free and repayments run over 12-18 months, meaning you have less pressure to pay it off very quickly. On the downside the system can be a bit painful to deal with and forces you to negotiate using Rentstart with the landlord which sometimes puts your application at risk.

Another option for people who might fall outside the eligibility for Rentstart may be able to use the No-Interest Loan Scheme (NILS). NILS is commonly used on household appliances and other costs, but can potentially be used for bonds. Again the repayment period runs for a lot longer than  21 days, and will be worked out with you based on what's really affordable for you to pay over time. With NILS you may not have the same issues negotiating with the landlord as under Rentstart.

What is the bond loan really going to cost you?

If rent.com.au thought everyone would pay the loan back within 21 days, this probably wouldn't be financially viable (other than as a marketing exercise) for them. Before you sign up, think about how much the loan is realistically going to cost you in a few different scenarios. First, if you can pay it off within the 21 days as intended. Second, if you can only pay half of it back and it converts into a regular bond loan for another 6 months. Lastly, if your plans to pay it back early fall through entirely, and you just make the minimum payments over 12 months. At $2000 rentbond doesn't attract an interest charge, only monthly fees - but that's ultimately just semantics. As we did on previous blog posts we've calculated the effective interest rate, representing all the costs.

  You pay it all back in 21 days You pay half back in 21 days and the other half over 6 months You pay the minimum payments over 12 months
Bond $2000 $2000 $2000
Fees and interest payments* $0 $240 $720
Effective per annum interest rate 0% 24% 36%

*These figures are indicative only, and do depend on the exact repayment schedule.

What if it goes wrong?

As you can see, even though there is no interest rate, the charges can be a pretty high percentage of the amount you are borrowing if you slip out of the 21 days. You are also up for late fees of $35 each time if you miss payments by more than 48 hours - not every loan is even that generous. These hundreds of dollars a year in fees and charges make a really big difference to many of us, so it is really important to consider the implications before entering into a loan. But if you're confident of being able to pay it back, this 21 day period does seem like it could be useful. You can discuss any problems with the loan providers, and they have obligations under their registration. But we also recommend talking to a financial counsellor about your situation if you are worried generally about your money and debts - talking to a counsellor early can often save you a lot of money and stress later on. You might also find it useful to have a chat with the Financial Rights Legal Service about your legal rights around the debt. You don't have to fight any problems by yourself.

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This development shouldn't let NSW government off the hook for ensuring that people who rent are able to move houses without being held up or put into precarious financial positions by the bonds system. By law tenants are entitled to their bond back by default - but in reality landlords can force bond claims through the Tribunal with no evidence, and no real chance of success, but they're banking on making it more hassle than it's worth for the tenants to fight. The provisions of the Residential Tenancies Act 2010 and the processes of the Rental Bond Board need to better serve tenants' interests - especially since we're paying for the whole thing through the interest on our bonds!