Payday lending – Be wary!

Payday loans, so called because they are meant to tide a person over until their next pay packet, have proliferated over recent times — and appear to be a permanent pothole in the financial landscape that can trip up the financially vulnerable in desperate times. Payday lending – Be wary!

The lenders issue small amounts of a few hundred dollars or up to a couple of thousand, usually at punishing rates of interest (although this is capped, more below) and typically with a maximum term of 12 months. The loan is generally unsecured, and is not always repaid from the applicant’s next salary deposit — even though that’s what the name “payday loan” may imply.

There are, according to ASIC (which regulates the industry) about 1,136 payday loan businesses, which are increasingly making inroads into the online retail sphere with direct credit smartphone apps.

Several retailers already offer interest-free finance and flexible payment options — those buy-now, pay-later deals. These however are set up essentially as a loan or a line-of-credit, and there can still be problems for the unwary, such as minimum required repayments set at a level that is not enough to repay the balance within the interest-free period.

In early August, the government announced that it would conduct a regulatory review of the industry. Assistant Treasurer Josh Frydenberg said a full report should be completed by the end of the year.

Since the National Consumer Credit Act was put in place in July 2010 (which acts to regulate and govern all credit and lending activities), payday lending has attracted not only the scrutiny of federal regulators but significant disciplinary action. Until the introduction of the act, regulation of consumer credit was generally handled by the states. Examples of violations include one payday lender The Cash Store, which according to a Choice report the Federal Court found was selling “useless” consumer credit insurance to customers, most of whom were on low incomes of Centrelink benefits.

The Australian Securities and Investments Commission (ASIC) has recently issued its own review of the payday lending industry (download the entire ASIC report here). It found that there are several compliance issues that need to be fixed with some of the key consumer protection laws operating in the industry. ASIC Deputy Chairman Peter Kell said: “The payday lending sector is on notice to improve its practices or further enforcement action is inevitable.”

ASIC identified that around a quarter of payday borrowers were also on some form of social welfare payment, and that just over half of loan applicants had already taken out two or more similar loans in the previous three months.

The regulator has also estimated that the overall value of small amount loans has been steadily increasing. ASIC said in its report that recent data (for the 12 months to June 2014) showed the total of small value loans was close to $400 million, which is an increase since 2008 of 125%.

Updated legislation has now put a cap on the fees and charges that accompany payday loans. The small amount lending provisions (the legislation’s here if you want to read it) limits “establishment” fees to 20% of the amount of credit, and “monthly” fees are capped at 4%. There is also a requirement that consumers who default under a small amount loan must not be charged an amount that exceeds twice the amount of the loan. Short term loans of $2,000 and less that you repay within 15 days or less are also banned.

By now, all of the big four banks have distanced themselves from the payday lending sector and have cut off funding to the payday industry.

For enquiries or complaints about lending activities, see this ASIC webpage.