For an industry that has only been around since 1998, payday lending has gained a strong foothold in the Australian credit industry.
And it's not just here that the payday business is booming—in the US, there are more of these short term lending companies than there are McDonalds, and in the UK, there is a payday loan shop for every seven banks.
At the end of 2013, there were an estimated one million Aussies using payday loans to fund short-term credit shortfalls, but while the stats speak for themselves, there are a few misconceptions about who these Australians are that choose to take out payday loans.
Are payday loans the go-to credit solution reserved for those on lower incomes, or are payday lenders receiving application forms with ticked boxes further up the income line?
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The misconception of bad credit
The common cry of payday lenders is that they provide 'bad credit solutions' for those who need quick access to finance. If it's the case that the majority or at least some of the applications are from people who have negative marks on their credit file, then it stands to reason that even high-income earners may be in need of the flexible lending criteria offered by these lenders.
Those Australians who earn more can experience cash shortfalls just the same as those on lower incomes, and with restricted access to finance due to bad credit history, they may find themselves in a position where a payday loan is their only option.
For instance, picture someone earning $90,000 a year. They're paying a mortgage, they have two cars, and they have bad credit history. Remember: A high salary doesn't equate to sound financial sense. They find themselves caught short in a month where they've just also just maxed out their credit cards taking a holiday. They need to make emergency repairs on their home so if they have no other option, they may find themselves taking out a payday loan.
Business and investments
The nature of some high-income earner's wages may also be inconsistent and unreliable, due to the fact that they are self-employed or have their assets and income tied up in investments. The volatile nature of their earnings may result in shortcomings both in their personal and business finances, necessitating quick access to credit. When it comes to personal finances, the lure of payday loans is because they offer almost instant access to money with low or no documentation needed.
For other personal loans and credit card applications, a regular income is usually needed to show the lender that you'll be able to repay the loan. That, or at least a stable income. So when income and assets are tied up in volatile investments, this type of traditional credit may be difficult to access. Those who make their money this way may also find their existing sources of credit maxed out, making payday loans one of their only options.
Business loans are a whole other ball game. Many business owners find themselves in the position of having limited access to consistent finance due to fluctuating cash flow or having much of their finances tied up in business assets. If a business owner doesn't want to risk their own personal finances to make necessary business purchases, or even to expand their business, they can turn to short term business financing—also known as a business payday loan.
Unsecured Cash Business Loans
These loans do not require applicants to satisfy the usual requirements set by traditional banks and lenders for other business loans. Eligibility usually depends on the business holding a rental lease, earning above a certain amount of revenue per month and have been trading for a minimum period of time.
With other business loans, extensive personal and business financial checks are made including credit checks, financial forecasts and details of how you will spend the loan. With a business payday loan, your business is usually approved for the average amount of revenue you make per month—even if that amount is up to $1,000,000. These loans open the credit doors for many businesses and their owners who earn high amounts of revenue but who are unable to secure credit from other sources.
The worldwide economy has never been stable. Stories of stock brokers jumping from Wall Street windows from the 1929 crash—when the world was far less financially connected—shows how detrimental the effects of a turbulent economy can be.
Following the GFC in 2008, many high-income earners felt the financial pinch that their lower income counterparts knew only too well. In the US, there were reports of a rise in the number of secured payday loans, with people trading jewellery and other expensive assets from their better days in for quick cash.
In Australia, people appear to have become more disciplined with their spending and saving habits following the detrimental effects of the GFC. Key findings from the 2014 ING DIRECT Household Financial Wellbeing Index revealed 80% of Aussies would prefer to save a 5% wage increase rather than spend it.
Despite this, figures still show many Australians struggle between pay-cheques. One in three households have used a credit card to cover necessary bills and expenses, while nearly half reveal they would need an additional $300 income per week to be financially comfortable. From the report, it was revealed that 63% of Australians admit to 'feeling the pinch' between paydays at some point, while a worrying 15% say it's always a bit of a stretch.
While credit cards are an option to cover expenses between paydays, it only takes maxed out credit cards or a few negative marks on your credit file to make payday loans one of the only options when you're caught short. And as the figures show, being caught short isn't only reserved for a small percentage of Australians only lower incomes.
Case Study: High income earner, Ben
Ben, 28 has recently started a new job. His previous position saw him making $90,000 p.a. while in his new position he's looking forward to a starting salary of $120,000. Ben is currently paying off mortgage on his house which he owns by himself and he owns his car outright.
It all sounds good, but trouble is Ben is going to be paid monthly in his new role. He was only required to give two weeks notice at his previous job, where he was paid weekly, and so could only save a small amount of money to tide him over until he receives his first paycheque. He makes his mortgage payments weekly, but only two weeks into his new position he realises he is falling short on money.
His two credit cards are maxed out and he can't wait the usual few weeks for another one to be approved and sent out to him. He also can't wait the few days or weeks it would take for a personal loan to be approved, also because a personal loan is for an amount far beyond what he needs.
Ben decides to take out a payday loan for a small amount of money—enough to cover him for the next two weeks until he gets paid, and repays the full amount when his pay comes in.
The Australian payday landscape
While the payday loan landscape keeps expanding and developing in Australia, so too can Australians' perception of it. For instance, there have been numerous regulations developed over the years to curb the high interest charges associated with these loans, helping to take some of the cost away from the convenience. Payday lenders are now restricted to charge 24% per month in interest and fees, as well as other fees for missed payments and defaults.
There have also been several reports and studies administered by the Australian Government, banks such as NAB, and also other third-party organisations as well as universities, which look into the Australian payday lending industry and its impact on our financial and credit landscape.
Payday lending is an accessible form of credit that is open to most Australians, and regardless of how much they earn, these Aussies may find themselves in a position where this loan product is their only option.