RMIT study: Payday loan reforms could hurt the most vulnerable

Elizabeth Barry 15 March 2017

struggling with debt

New study suggests that lending reforms that restrict access to financial services could deprive low-income earners of basic necessities.

Despite recent payday lending reforms, calls to tighten regulations around short-term loans have persisted. However, a new study suggests that changing these lending rules could leave low-income earners without access to home basics such as white goods, furniture and Internet access.

The research discusses how borrowing money for certain household goods can be financially detrimental to the borrower but can have a positive impact on that person's wellbeing.

"A household’s level of wellbeing depends on more than just access to a safe and affordable physical structure,” said associate professor Ashton De Silva from the RMIT Centre for Urban Research and the School of Economics.

“Households require access to particular goods such as washing machines, separate beds for each child and televisions for them not to be considered deprived," De Silva said. “To secure these essentials, low-income earners may seek some form of credit in the form of an alternative financial service (AFS), as standard options such as bank credit are typically not accessible to them.”

These AFS products are usually consumer leases and Small Amount Credit Contracts (SACCs), also known as payday loans. Due to the steep cost of these products they have come under legislative scrutiny several times, with the first notable changes being introduced in March 2013 where loans with terms of 15 days or less were banned.

The most recent changes saw a fee cap introduced for consumer leases and a change to protected borrower income for payday loans, among other reforms.

De Silva says that despite the costs, it appears that consumers are using consumer leases and payday loans to secure housing essentials.

“If consumers are indeed being adequately informed of their financial obligations in engaging with such services, they are making the best decision in the context of their circumstances.”

Low- and no-interest loans are a great alternative to payday loans and provide yet another argument against them. However, while these loans (provided by Good Shepherd Micro Finance) are a better alternative, the borrower needs to meet strict eligibility criteria to apply. The turnaround time also isn't comparable to payday loans.

Costs remain a concern for opponents of short-term lending, but De Silva says that any future reforms to these loans need to take into account why households are turning to these forms of credit.

“We need to have a deeper understanding of what consumers are securing with these financial services if we are to truly appreciate the why."

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