What is responsible lending?
Responsible lending mandates that significant effort must be made by a lender to ensure a loan is actually a good option for you, as the consumer or borrower.
The National Consumer Credit Protection Act 2009 sets out how lenders must act when they are assessing loan applications.
Essentially, it means a lender must only offer a loan if it is suitable for the borrower. Importantly, the rules put the responsibility on the lender to ensure the credit product is suitable for you.
To do this, lenders must:
- Make reasonable inquiries about a consumer’s financial situation, and their requirements and objectives.
- Take reasonable steps to verify a consumer’s financial situation.
- Make a preliminary (for brokers and others providing credit assistance) or final assessment about whether the credit contract is ‘not unsuitable’ for the consumer.
- If a consumer requests it, provide them with a written copy of the preliminary assessment or final assessment (as relevant).
A loan is classified unsuitable if:
- The borrower won’t be able to afford their repayments, or they can only do so with significant financial hardship and sacrifices.
- The loan does not meet their financial objectives or their needs.
What happens if your lender did not lend responsibly?
According to Maurice Blackburn lawyers, if you’ve received a loan that you’re struggling to repay or you have defaulted, you may have a claim for compensation against the lender if it failed to recognise that your loan was unsuitable for you at the time it was entered into.
According to the Australian Financial Complaints Authority’s (AFCA’s) approach to responsible lending, righting a wrong brought about by irresponsible lending is normally done by compensating the borrower for their losses, though limits to said compensation apply.
If your lender offers compensation, it will likely be calculated by subtracting any benefits you received from having the debt from your total losses born from the debt:
- Losses: Like stamp duty, acquisition costs, and interest.
- Benefits: Like saved rental costs and capital gains (if applicable).
Alternatively, you may be able to request your debt to be forfeited and a refund of all the repayments you’ve made thus far if:
- You haven’t received any benefits yet.
- You have been forced to apply for the loan under duress (like financial coercion, domestic abuse, or severe hardship).
Whichever situation you find yourself in, we recommend seeking legal advice if you believe your lender has placed you on an unsuitable loan product.
What is responsible borrowing?
Unlike responsible lending, responsible borrowing isn’t typically legally enforceable, but making sure you’re borrowing within your budget can offer substantial benefits.
Responsible borrowing means taking on a realistic amount of debt by knowing the exact cost of doing so and how much your income can sustainably afford to hand over in repayments.
Just because a lender is willing to lend you up to a specific amount of money, doesn’t mean you should borrow the full amount.
A lot of the responsibility when it comes to the suitability of the loan is also dependent on the information provided by the borrower to the lender.
A FICO survey conducted in 2025 found that one in three Australians believe overstating one’s income or assets is a justifiable or common practice. Securing a loan by misrepresenting your financial position could land you what's called a ‘liar loan’.
This can leave borrowers vulnerable if interest rates rise, or their income falls. It can also lead to financial hardship and damage your credit score, which can impact your chances of getting approved for credit or a loan in the future. And if you’re caught lying on a loan application, it could see you locked out of borrowing from that institution (and potentially others) going forward.
If you’d like to check your credit score, you can do so for free with Canstar or via the Canstar app.
The importance of responsible lending
There are several reasons why responsible lending is important for both borrowers and lenders, including:
- Protects consumers: Responsible lending protects consumers by ensuring they receive loans that are affordable and suitable for their needs. Irresponsible lending practices can lead to high levels of debt and financial hardship.
- Reduces the risk of default: When lenders engage in responsible lending practices, they ensure borrowers receive loans they can reasonably repay. This reduces the risk of default, which can harm both parties.
- Promotes ethical behaviour: Responsible lending practices promote ethical behaviour in the financial industry. By adhering to ethical principles, lenders can build a positive reputation and earn the trust of their customers.
- Solidifies the financial system: Responsible lending practices help protect the broader economy.
What to consider before taking out a home loan
Before taking out a home loan, think through whether you really need a home loan, if you can afford it, and whether it will be worth it in the long run.
It’s important to keep in mind things such as the:
- Interest rate
- The size of your loan deposit
- Your loan-to-value ratio (LVR)
- Fees and charges
- The comparison rate
- Whether you need features such as an offset account or redraw facility, which can attract extra fees.
All this information can be found on any relevant documents such as the Product Disclosure Statement (PDS), Target Market Determination (TMD) and Key Facts Sheet (KFS).
Free financial advice is also available from a financial counsellor via the National Debt Helpline (NDH), which you can contact on 1800 007 007. The NDH helps consumers find individual counsellors and organisations in their area. It can also provide information and resources on what your rights are if you are experiencing financial hardship.
If you’re ready, you can start comparing home loans from our select panel of lenders on our home loans hub page.
