Where can you find the world's fairest payday loans?
It's not too much of an outlandish statement to say that Australia trails behind the world's superpowers in a few different areas. While we are by no means coming last in any race — be it technology, finance or even policy — the size of our country, population and economy, means that we're often not coming first. There are, however, times when Australia does impress on the world stage, and it appears that the state of our payday industry is one of them.
Australian payday laws
In July 2013, a cap was introduced to limit the amount of fees and interest charged with small amount loans, also known as payday loans, in Australia. The cap applied to all loans up to $2,000 that had repayment terms of between 16 days and one year. Loans with repayment terms of 15 days and less have been banned since March 2013.
Why were these laws introduced?
The regulations were introduced in an effort to protect vulnerable borrowers. According to a paper produced by Monash University on The Politics of Payday Lending Regulation in Australia, the Enhancements Bill was introduced into parliament in September 2011 to reduce the cost of payday loans and "address the risk of borrowers being trapped in debt". While a series of amendments were made to this bill up until August 2012, it resulted in sweeping changes to the Australian payday industry.
Essentially, it became apparent that the people who took out payday loans were also the borrowers who would suffer the most from high fees and rates. The report from Monash said that Australian payday loan borrowers tend to be those on lower incomes, with the majority not having access to a credit cards or mainstream bank loans. Over 60% also had adverse credit histories. Payday loans were generally sought out as an emergency type of finance that was needed to "make ends meet". Because of this, these borrowers were identified as vulnerable, necessitating the need of regulation in the industry.
An Australian "fair go": Why every Australian needs access to credit
Having the ability to access credit is an important measure of fairness in Australia. In a 2012 Social Impact Report, access to consumer credit was found to be one of the three key measures of financial inclusion. The other two measures were basic banking products and insurance coverage.
The typical payday loan borrower has limited access to traditional forms of credit, so to level the playing field, the first payday lender was set up in 1998. This was followed by three more firms in 2000. The demand for this type of credit was shown from the immediate growth of the industry. Between 2000 and 2001 there was a 640% growth in the amount of monthly payday loans financed in the Australian market.
Payday loans saw that everyone in Australia, no matter what their credit history, income, or debts, had somewhere to turn when they were in need of financial assistance. These loans are defined as "fringe credit", and so existed outside of the loan products offered by mainstream banks and credit unions. The laws that were introduced to regulate the industry saw that the people who turned to these loans had some level of protection. It ensured that, by them having a "fair go", they weren't being taken advantage of by predatory lenders or fell into cycles of debt.
How payday loans work around the world
Payday loans in the UK
The UK payday lending industry is nothing short of booming. In March 2014, it was estimated that there was one short-term loan shop for every bank and building society in the UK. According to a report in The Guardian, the UK Competition Commission found that UK payday borrowers are not unlike those borrowing here in Australia. Payday borrowers are likely to be "social tenants, in part-time work or unemployed, lone parents, unqualified or on low incomes." In other words, the most financially vulnerable members of society.
Still, the UK payday industry has been riddled by high interest rates, dangerous repetitive borrowing and irresponsible lending from the three firms dominating the industry. It was only in late 2014 when a cap was announced for payday loans to come into effect in January 2015. The maximum interest rate is now capped at 0.8% per day, there is a £15 limit on default fees, and there is a total cost cap of 100% of the amount borrowed. These regulations were introduced with the hopes of curbing the detrimental effect payday loans were having.
Payday loans in the US
Payday loans originated in the United States following a high demand for small, short-term advances on a person's pay. These loans are not federally regulated in the US, and as such the laws differ depending on what state you're in. Some forms of short term loans are illegal in at least 14 states. There are huge discrepancies over what's allowed and what's not. For instance, some states have a cap on the number of loans a person may borrow at one time while others have no such limit.
Payday loans in the US are typically between $50 and $1,000, with terms ranging from anywhere between seven days to six months.
What a payday loan will cost you...
...in the UK
...in the US
|The cap on Australian payday loans has been in force since July 2013. Lenders are allowed to charge the following:||The cap on payday loans in the UK has been in effect since 2 January, 2015. Lenders cannot charge more than the following:||Payday loans are regulated at a state level in the US. Here are some of the restrictions that apply:|
|What will you pay on a $300 loan repaid in 30 days?|
|£372||Depends on the state|
Are Australia's payday loans fair by world standards?
With the major Western players making moves towards regulating their payday industries – the UK have had a standard cap on interest rates and fees since January 2015 – how do our regulations fare? The UK cap on payday loans will see a limit of 0.8% interest per day, £15 limit on default fees, and a total cost cap of 100% of the amount borrowed. So, at 0.8% interest per day, UK borrowers will be paying around 24% interest per month.
As you've seen above, Australians are charged a monthly fee of 4% of the loan amount and an establishment fee of 20%. So, if the payday loan term exceeds one month, the accumulative fees are a low 4% rather than 24%. UK borrowers are protected with the total cost cap of 100% of the amount borrowed.
It seems with new regulations, Australian and UK payday borrowers are offered a similar scope of protection. In terms of stacking up the UK and Australian laws against those in the US market, the differences in laws across the states makes it difficult to establish a fair comparison.
How are you protected by Australian payday legislation?
The National Consumer Credit Protection Act (2009) is the main legislation in place to protect Australians from unfair payday loans, and to set out a resolution process for consumers who wish to lodge a dispute. If you find yourself in a position where you want to lodge a dispute, the process is as follows:
- Make a 'Financial Hardship Application' to your lender
- If an internal review is undertaken, this will involve your lender following up with internal dispute resolution
- You also have the option of going to the following governing bodies for an external review:
- Financial Ombudsmen Service (FOS)
- The Credit Ombudsmen Service Limited (COSL)
- The Credit Compliance Monitoring Committee (CCMC)
Room for improvement
There is still much discussion, both here and overseas, over the state of payday lending and the effect these loans have on the people who take them out. Considering the efforts that have been made to research the trends in the payday market in Australia, the UK and the US, these findings can be used to better shape the payday market for future borrowers. So where should the focus be?
- Efforts to stop repeat borrowing spiraling into uncontrollable debt
- More information about alternative credit options for borrowers
- Access to calculators and other tools to help better determine the true cost of borrowing
The financial landscape in Australia is not, and never has been, perfect. Fair access to credit is of primary importance to Australians, both in terms of financial mobility and for stability with short term and long term living. Payday loans have filled a gap in the credit market, and the demand for these types of loans shows their necessity while Australia's financial landscape is as it stands. But in order to protect the most vulnerable borrowers – that is, those who find themselves in need of a payday loan – regulations need to be in place and be consistently reviewed and developed. Australia has been a world leader in this regard. In saying this, it is still up to the borrower to decide whether he or she can really afford to take out a loan, and manage the repayments if they decide to do so.