As Australia’s payday loans market continues to grow, we take a look at past, present and future government attempts to protect borrowers and regulate this booming industry.
Payday loans in Australia have been the topic of many heated political debates in recent years. As consumer and welfare groups push for tighter restrictions on the questionable practices of some payday lenders, successive federal governments have moved to introduce new legislation to crack down on the booming small loans industry.
But payday lenders have pushed back using their financial might to ensure that any legislative changes have been heavily watered down. So why are payday loans the cause of so much financial angst, how has regulation changed over the years and, most importantly of all, what does the future hold for payday loans in Australia? Read on to find out.
The rise and rise of payday lending
Wind the clock back 20 years and payday loans were relatively unheard of in Australia. However, in the late 1990s and around the turn of the century, as banks and credit unions cut back on their short-term lending, the market for small-amount personal loans from alternative financial service providers expanded rapidly. For borrowers looking for fast and easy access to cash, especially those with a bad credit history, payday loans represented a quick-fix solution to financial pressure.Since its rapid rise at the end of the 1990s, the payday lending industry has gone from strength to strength. In the decade leading up to 2014, the demand for short-term, short-amount loans increased twentyfold. In fact, in 2012 alone, it’s estimated that more than one million Australians took out this type of loan, generating fees and interest charges valued at a total of up to $1 billion.
Experts point to a range of factors that have contributed to this increase, including income inequality, increasing casualisation of the labour market and difficulties for borrowers from lower socioeconomic backgrounds to access credit from traditional providers. The rise of online lending has also played a part, providing quick and simple access to loans of up to $2,000 without having to get off your couch.
The problem with payday loans
For some borrowers, payday loans serve the stated purpose, providing a quick injection of cash to tide them over for a short period of time until the money is quickly paid off. Unfortunately, for many more borrowers, a short-term loan can be the first step on a frightening descent deeper and deeper into debt.Notorious for high interest rates, even higher fees and strict repayment deadlines, payday loans can often be a one-way ticket to a cycle of debt. What’s meant to be a quick solution to help you pay an unexpected bill can soon become too difficult to afford, causing borrowers to take out another payday loan to pay off the first. Before you know it, you’ve racked up sizable debts on multiple loans.
Stories also abound of payday lenders taking advantage of disadvantaged or vulnerable borrowers, such as those with learning difficulties or little-to-no financial literacy. If you don’t know what you’re signing up for, a payday loan can be a very dangerous prospect indeed.
But despite their checkered history associated with unconscionable lending practices, payday loans do still serve an important purpose. The ability to access credit is one of the most important indicators of fairness and financial inclusion, but it’s a freedom that many Australians simply do not have.
Australian studies have found that most payday loan borrowers do not have access to a credit card or mainstream bank loan, while 60% are hampered by a bad credit history. Without any other credit solutions available, payday loans may seem like the only way some borrowers can access the finance they need.
In response to the rapid growth of the payday loans industry and rising concerns that it was trapping more and more Australians in debt, the Federal Government introduced new legislation, which took effect in 2013. The Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Enhancements Act) proposed a number of regulations and restrictions on payday loans, which, although they were adjusted following a lobbying campaign from the payday lending industry, led to several key changes.
The small-amount lending provisions in the Act include:
- Banning loans of up to $2,000 that must be paid in 15 days or less. In fact, payday loans technically no longer exist in Australia and they have been replaced in the legislation by the term “small-amount credit contracts” (SACCs). However, SACCs are still commonly referred to colloquially as payday loans.
- A cap on loan fees and charges, with a maximum establishment fee of 20% of the credit amount and a maximum monthly fee of 4% of the credit amount.
- Borrowers who default on a small-amount loan must not be charged a penalty that exceeds twice the loan amount.
- The presumption that a loan is unsuitable for a borrower if they are already in default under another small-amount loan, or if they have had two or more other small-amount loans in the past 90 days.
- Protection for borrowers who receive 50% or more of their income under the Social Security Act 1991.
- A requirement for lenders to display a warning statement advising consumers of the alternatives to a small-amount loan.
A work in progress
These measures were meant to protect the most vulnerable borrowers in our society and free them from the cycle of payday loan debt, but whether the legislation has achieved that goal is still up for debate.
Reports of the unconscionable lending practices of payday lenders still continue to make headlines. One such example is the report of the Australian Securities and Investment Commission (ASIC) fining payday lender The Cash Store $18.9 million in February 2015. The Cash Store, along with loan funder Assistive Finance, was found to have sold “useless” consumer credit insurance to borrowers on a low income or receiving Centrelink benefits.
The small-amount lending provisions have come under review several times since their introduction, with several important changes being made to improve their effectiveness. And the changes keep on coming.
A 2015 ASIC review found that nearly two thirds of the 288 files it reviewed across 13 payday lenders indicated that a payday lender had entered into a small-amount loan agreement with a borrower who appeared to be unsuitable for the loan. From this, the regulator concluded that payday lenders “are continuing to allow some consumers to use small-amount loans as part of their monthly budget”.
ASIC has now banned direct debit fees on any payday loans issued after 1 February 2017 and, in a reflection of the shift in global attitudes towards protecting borrowers against payday loans, Google has even banned ads for payday loans with terms of less than 61 days.
In the latest round of Government reviews published in March 2016, the government vowed to retain the fee cap on SACCs and introduce a protected earnings cap for all borrowers, which stipulates that repayments must not comprise more than 10% of a borrower’s income. This cap was previously set at 20% but only applied to borrowers receiving Centrelink payments.
Looking to the future
The latest recommendations are expected to come into effect at some point in 2017, but their introduction can’t come soon enough for many consumer action groups. These groups have continued to push for tighter regulations on payday lenders and with good reason, as questionable lending practices still seem to be a widespread issue.
In November 2016, ASIC ruled that short-term lender Cash Converters must repay $10 million to customers after it was found to have issued small-amount loans to online borrowers without first verifying their income and expenses. This was accompanied by an order for Cash Converters to pay a $1.35 million penalty.
Another lender, Nimble, faced similar action earlier in the same year, when ASIC ordered it to refund in excess of $1.5 million to more than 7,000 customers after failing to meet responsible lending obligations.
Most recently, payday lender Fast Access Finance was fined $730,000 for using a fake diamond scam to skirt regulations surrounding the maximum interest rate allowable on loans. ASIC alleged that the lender offered loans of between $500 and $2,000 to customers once they signed a contract that purported to be for the purchase of diamonds, but this was merely a pretence as there were no diamonds actually involved.
But despite these many examples of questionable lending practices and the clear need for better regulation, small-amount loans still serve a very important purpose. In the interim report of the Government’s most recent payday loans review, the review panel acknowledged that “SACCs can be useful for consumers when they are used as an emergency source of funding for one-off expenses” and that “in emergency situations the benefits of having access to credit can justify the relatively high costs, provided the consumer can afford them”.
So-called payday loans form an important part of the Australian credit landscape, but the big challenge facing regulators is ensuring that these loans are only ever issued to borrowers who can afford them. How they do that remains to be seen.