The Credit That Keeps On Costing

You can’t miss the brightly coloured shop fronts of payday lenders like Cash Converters or the Cash Store. For the one in eight Australians who find themselves living on the poverty line, they can be a source of quick and easy credit.

Payday loans are small short term loans (anything from $50-500) which attract high fees, interest and charges. It’s an often predatory practice that has been targeted by a recent set of reforms championed by Bill Shorten. New legislation came into force this week which will cap fees charged on these loans to a one-off fee and a monthly account keeping fee. This is a positive step but consumer advocates say that these measures do not go far enough.

Last year, a study on payday lending, Caught Short, was published by academics from Queensland University of Technology, the University of Queensland and RMIT. The report found that 80 per cent of borrowers were receiving a Centrelink or pension payment and many reported struggling with physical, psychological and emotional health problems. It also discovered that most borrowers were taking out loans to meet basic expenses such as food, bills, car repairs and rent.

The report, full of stories of desperate choices, is grim reading. The young mother needing money to buy nappies, the disability pensioner borrowing to pay his electricity bill, the Newstart recipient who describes being in hock to payday lenders as “like suffocating in your sleep”.

These kinds of stories are all too familiar to Gerard Brody, the CEO of the Consumer Action Law Centre, a not-for-profit organisation which provides free legal advice and representation to vulnerable and disadvantaged consumers in Victoria.

“Payday loans worsen rather than improve someone’s financial position," he told NM. "They are marketed as a one-off solution to temporary problems – so if your fridge breaks down and you need to get it repaired quickly – but in reality that’s not the way they operate.”

Brody says that consumers often find themselves unable to repay a loan and then take out another loan to cover themselves, becoming trapped in a cycle of debt.

“Repeat borrowing is common and necessary to the viability of the lenders’ business. So you might get out a loan to cover an emergency expense, you have to repay it in 2-4 weeks, plus fees and charges. The repayment is usually timed to leave your account on the same day that your pay or Centrelink benefit arrives. You’re then left with not enough for your following pay period so you’re encouraged to go back for another loan.”

Payday loans have proved controversial in the UK too. Last month, the UK Public Accounts Committee issued a report which was highly critical of the practices and regulation surrounding the UK industry, stating that there was evidence that lenders targeted people with drug, alcohol and mental health problems.

Rob Bryant is the CEO of Money3, a business which provides both small and large loans to people across Victoria. He rejects the argument that lenders are exploiting consumers. He tells New Matilda that Money3 is providing a crucial service for people who can’t access mainstream credit.

“Credit is a basic human right. There are all sorts of people that can’t get credit – doctors, teachers; we’ve even had an orthodontist. We buy time for people. We give them a fair go. If we weren’t there, I think many people would go into bankruptcy.”

Bryant thinks the new regulations will give consumers adequate protection but admits that, longterm, better financial education is the key to improving the lives of those who use his services.

“The industry is confident that the new legislation will help. I think it will provide a blueprint for countries such as the UK. But it’s also time for industry and consumer advocates to start working together to invest in better financial education for those Australians who are, for whatever reason, financially challenged.”

Fiona Guthrie, the Executive Director of Financial Counselling Australia, is sceptical about the view that giving people more money will help them. “The payday lending industry assumes that credit is an answer to financial difficulty. It isn’t. The fundamental problem is often poverty and all that a payday loan will do is exacerbate what was already a difficult situation,” she says.

Guthrie says that there is a range of options available to help those who find themselves in financial difficulties, either through organisations such as Consumer Action or through financial counsellors.

“Financial counsellors can help with things like drawing up a budget, facilitating access to a hardship program of a utility provider or negotiating reduced repayments or even a payment moratorium with lenders. There are also many community organisations that provide No Interest Loans for people on low incomes to purchase items such as white goods.”

As the economy slows down and banks tighten up their lending practices, there’s good reason to believe that payday lending looks will grow in Australia. “This is a highly profitable industry,” says Guthrie. “We expect it to increase, with a particular growth in online offerings.”

According to Professor Greg Marston, a co-author of Caught Short and an expert in welfare policy from Queensland University of Technology, the new legislation is not enough to protect vulnerable consumers.

Marston says that the main problem is not lack of knowledge among low-income citizens about how much the loan will cost but rather the lack of affordable credit options for low-income borrowers. He argues that it is the government’s responsibility to deal with this.

“The government has a responsibility beyond regulating the price of market-based credit products. They have a role in ensuring people have a sufficient income in the first place through supporting decent wages and taking steps to increase social security payments, particularly the Newstart Allowance.”

This is why, says Marston, legislators need to look at the bigger picture.

“What we were trying to do with the [Caught Short] report was understand why demand for payday loans has been growing rapidly in Australia. What we uncovered were clear structural problems, such as inadequate income security payments, spiralling housing costs and increases in the costs of utilities. As such, increased financial education and literacy is not enough.”

Find out about financial counselling in your region by calling 1800 007 007 or visiting Money Smart.