Pay-Day Loans Under Review

Not for Profit organisations have backed a Federal Government review into high-cost payday loans and consumer leases, better known as “goods rental” or “rent to own”.

The Government has announced a five-month investigation into the practices of payday lenders to be chaired by the CEO of Equipsuper, Danielle Press, with panel members, chair of Funds Management Victoria, Catherine Walter and HWL Ebsworth's Stephen Cavanagh.

The Review will look at the small amount credit contract (SACC) laws and related provisions in the National Consumer Credit Protection Act 2009 (Credit Act).

Consumer Action Law Centre said payday loans and rent-to-buy products are excessively expensive, meaning the poor are paying more for essential household goods and credit.

“The legislated cap on fees and interest for payday loans hides annualised interest rates exceeding 240 per cent, while rent-to-buy products can end up costing customers two to five times more than standard retail price,” CEO of Consumer Action, Gerard Brody said.

“The industry often claims that they’re helping people access essential items and credit, but more often than not these high-cost credit products make bad financial situations even worse.

“A key issue for the inquiry is how to protect the vulnerable from ongoing reliance on very high-cost credit. One way to do that is to reduce the amounts of fees and charges that can be imposed.”

Brody also said the review must consider the lived experiences of people targeted by these businesses.

“The reviewers must speak to Australians who have used these products in order to understand their circumstances and the harm these products can cause. It’s pleasing that the reviewers will consult widely, and this should include financial counsellors and community lawyers who are dealing with the impact of these products on a daily basis,” he said.

One of Australia’s largest microfinance organisations, Good Shepherd Microfinance, has also welcomed the Federal Government’s review.

Good Shepherd Microfinance and its community partners say they hear firsthand the consequences of these high cost products.

“The large majority of people on low incomes simply can’t afford to be paying such a premium for credit or a lease,” CEO Adam Mooney said.

“We are seeing that the negative impact of payday loans and ‘rent to own’ is disproportionately affecting women who often turn to these products due to income inequality and financial exclusion.

“That is, being unable to work due to carer responsibilities, being paid less, or being underemployed through variable short term casual or contract arrangements which are increasing in the health, education and community sectors.

“Payday lenders are eager to tell you how quickly they can have the money in your account and how fast you’ll be approved, but what they’re trying to do is entangle the borrower in endless expensive credit.

“By continually extending the credit, a borrower can be left without enough money to pay for day-to-day living expenses such as food and utility bills, which often leads to entrenched poverty.”

The Not for Profit said that while the business model is different, consumer leases share many similarities with payday loans: they target people on low incomes, camouflage the cost of their products, and in many cases, can make the customer’s financial situation worse.

Mooney said goods rental companies advertise a weekly repayment rate which may seem affordable, but what they don’t tell you is that by the time the contract ends you’ll have paid almost three times more than someone who bought the product outright.

“In dollar terms a consumer lease will see you pay around $1,800 for a $650 fridge and will take three to four years to repay. It’s a stark contrast to our No Interest Loan Scheme, under which a $650 fridge costs just that – $650,” he said.

Good Shepherd Microfinance’s No interest Loan Scheme (NILS) offers loans to people on low incomes for essential items like fridges, washing machines and school expenses.

Mooney said Good Shepherd Microfinance was looking forward to contributing to the Government’s review.

“We’ll be asking the Government to look at introducing new consumer protections to both the payday lending and consumer lease sectors, but will also be highlighting the importance of, and the need to further invest in, products and services that promote financial inclusion,” he said.

Announcing the review, Federal Assistant Treasurer Josh Frydenberg said the Government recognised that small amount lenders can play an important role in the economy by providing credit to consumers who are excluded from mainstream forms of finance.

“The Government wants to ensure that the regulatory framework strikes the right balance by protecting vulnerable consumers without imposing an undue regulatory burden on industry.”

The review panel will report by the end of this year. The Terms of Reference for the inquiry can be found HERE