Predatory Loans - A buzz-phrase or a valid concern for Aussie battlers?

Australians have borrowed more than 3 billion dollars from payday lenders between 2016 and 2019 alone.[1]  Commonly used in times of financial distress, payday loans provide borrowers with instantaneous cash, usually in relatively small amounts, and loans are often granted within 24 hours of the borrower’s application. A report compiled by consumer advocacy groups have deemed payday loans as predatory in nature, with Australian battlers falling victim to crippling interest, and the aggravation of already accumulating debts.  However, one might say that common sense should prevail in the minds of borrowers before entering into such arduous agreements. Or is it, that these lenders are praying on those in financial distress? As the saying goes, desperate times call for desperate measures, and the 550 million dollar profit made from these lenders in the past three years is a clear measure of the times.[2]

 

The Victim Demographic

Broadly speaking, people who opt for payday loans are “those doing it toughest in society.”[3] There is a growing group emerging who are reliant on payday loans, of those with insecure employment, perhaps with higher expenses, otherwise known as the financially distressed. [4] Of the 23 percent of female borrowers, 41 percent are single mothers,[5] a cohort often characterized as doing it tough. A report compiled by the “Stop the Debt Trap Alliance” has found that the number of financially distressed households with payday loans has risen significantly, with the number jumping from 21,000 in 2010 to approximately 1.77 million in 2019.[6] Research has indicated that 85.8% of these loans are generated online,[7] with accessibility, expedience and consumer-targeted ads, misrepresenting payday loans as painless means to solve immediate monetary problems.

To the contrary, many payday loans aren’t transparent with respect to interest rates, which can be hidden in the fees and charges that borrowers pay. Some rates have been found to be as high as 400 percent,[8] which can cripple borrowers who are already in a state of financial distress.

 

A Debt Spiral  

It has been estimated that 15% of payday borrowers will fall into a debt spiral, which can potentially have implications such as bankruptcy.[9] The insolvency profession is yet to properly gage the figures of payday borrowers entering bankruptcy, as the sharp increase in usage is relatively novel. However, lenders are still at liberty to act recklessly with no current caps  on charges, so borrowers who are likely to enter into a debt spiral is only going to increase if there fails to be swift legislative intervention.

 

ASIC Intervention

Following the banking Royal Commission, the Australian Government has vowed to take affirmative action in its monitoring of the financial services sector, though it doesn’t appear as though this has quite extended to payday services.[10] However, ASIC has now been granted with product intervention power, and it appears as though their first target  will be predatory short-term lenders.[11] The key trigger-point for ASIC’s new powers, is the ability to address significant distress caused by financial products, regardless of whether they were lawfully provided.[12] It follows, that the Australian Government as a whole should follow suit, by firstly, acting on the recommendations made by the 2016 Small Amount Credit Contract Review, that the Government had committed to implement over 1000 days ago.[13]

Furthermore, the law need to be changed, as many payday lenders are exempt from credit licensing, conduct and responsible lending obligations under the National Consumer Credit Protection Act 2009 (Cth), provided they meet certain thresholds.[14] 

 

Desperate Times 

The Business Insider has stated that the Australian economy is set for its worst year since the 1991 Recession, with wages increasing so slowly that it has undermined job creation and consumption. Furthermore, the price of many of life’s necessities has climbed over the years, not to mention the debt burden created by soaring house prices.  

As such, it is unsurprising that Australian battlers have opted for the payday lending solution to resolve immediate credit emergencies. As mainstream credit tightens following the Royal Commission’s enquiry into the big four banks, an unintended consequence of the banks pulling out of less mainstream credit products has forced battlers into the hands of less regulated players.[15]

It follows, that though the regulatory powers granted to ASIC are a step in the right direction, the calls for the legislative intervention in the growing payday sector must be answered.

 

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[1] Sarah Martin, “More than 30,000 payday loans targeting the financially vulnerable taken out each week”, The Guardian, (Australia), 12 November 2019, https://www.theguardian.com/australia-news/2019/nov/12/more-than-30000-payday-loans-targeting-the-financially-vulnerable-taken-out-each-week

[1] Stephen Letts, “ASIC set to take action against predatory lenders”, The New Daily, (Australia), 12 September 2019, https://thenewdaily.com.au/money/finance-news/2019/09/12/asic-payday-lenders/

 

[1] Sarah Martin, “More than 30,000 payday loans targeting the financially vulnerable taken out each week”, The Guardian, (Australia), 12 November 2019, https://www.theguardian.com/australia-news/2019/nov/12/more-than-30000-payday-loans-targeting-the-financially-vulnerable-taken-out-each-week

[2] Ibid.

[3] Katri Uibu, “Millions of Australians falling victim to predatory payday lenders, report shows”, ABC News, (Australia), 12 November 2019, https://www.abc.net.au/news/2019-11-12/payday-loans-increasing-single-mums-growing-borrowing-sector/11694908

[4] Ibid.

[5] Ibid.

[6] Benita Kolovos, “Payday loans victimise millions of Aussies”, Perth Now, (Australia), 12 November 2019, https://www.perthnow.com.au/business/payday-loans-victimise-millions-of-aussies-ng-s-1978978

[7] Sarah Martin, “More than 30,000 payday loans targeting the financially vulnerable taken out each week”, The Guardian, (Australia), 12 November 2019, https://www.theguardian.com/australia-news/2019/nov/12/more-than-30000-payday-loans-targeting-the-financially-vulnerable-taken-out-each-week

[8] Katri Uibu, “Millions of Australians falling victim to predatory payday lenders, report shows”, ABC News, (Australia), 12 November 2019, https://www.abc.net.au/news/2019-11-12/payday-loans-increasing-single-mums-growing-borrowing-sector/11694908

[9] Sarah Martin, “More than 30,000 payday loans targeting the financially vulnerable taken out each week”, The Guardian, (Australia), 12 November 2019, https://www.theguardian.com/australia-news/2019/nov/12/more-than-30000-payday-loans-targeting-the-financially-vulnerable-taken-out-each-week

[10] Stephen Letts, “ASIC set to take action against predatory lenders”, The New Daily, (Australia), 12 September 2019, https://thenewdaily.com.au/money/finance-news/2019/09/12/asic-payday-lenders/

[11] Ibid

[12] Ibid

[13] Ibid