Consumer advocates fear loopholes in lending laws could open the floodgates to predatory lending for millions of vulnerable Australians.
- Experts say many people seek out payday loans when they are in financial difficulty
- But some lenders often charge significant fees
- Consumer advocates say payday lenders can dodge the Credit Law through ‘loopholes’
The focus is on payday lenders, which offer short-term loans to help customers pay their bills before their next paycheck.
Cairns resident Rachel Black, 58, used a payday lender to supplement her salary each month.
“You start by borrowing a small amount and then you think well that you know it’s okay, I can handle that.
“I’ll just add $50 if they give it to me. I’ll just add $100.”
She says it was easy to get credit and if she couldn’t afford the repayments, she would borrow from another lender.
“It hurts the most when you borrow an amount that has huge interest,” Ms Black says.
“And you pay back almost half of what you borrowed, you know. It takes a long time when you borrow too much.”
Financial adviser Kylie Holford says Ms Black’s experience is common and in her experience people seek out payday loans when they are already in financial difficulty.
“Or a lot of people say I actually understood, but I was in such a vulnerable place that I just needed the money,” she says.
“But what they also don’t understand is that they may have a little idea of some of the charges, but they don’t understand what happens if they miss the payments, and what the repercussions of the missed payments.”
How do payday lenders get around credit laws?
Consumer advocates are well aware that some payday lenders charge hefty fees.
Consumer Action Law Center policy manager Tom Abourizk says it’s also legal, under current credit law.
He says payday lenders can avoid falling under the Credit Law — and therefore charging high fees — by saying they only hire borrowers for very short periods of time.
This is also the case if they engage clients with two separate contracts – one for the loan and the other for the financial services provided.
“The first is called a short-term credit exemption, which is a credit law exemption that basically says you can charge if you can charge a small fee if your loans are paid off – I think that’s a maximum of 5% on the loan being granted – then you can qualify for a waiver.
“They use a second contract that is tied to the contract that meets this exemption, and the one where they charge their exorbitant fees.
“Essentially they broke up [the bill] in two.
“And so you get a service where if you went with another lender, everything would be done in one contract.
“But essentially they split the whole thing into two contracts.”
Defenders call on ASIC to act quickly
The regulator, the Australian Securities and Investments Commission or ASIC, is aware of short-term credit providers charging large fees to customers.
But Mr. Abourizk says the regulation wheels are not turning fast enough.
“This is a really clear example of serious harm being done to vulnerable people across Australia and it has taken too long to act,” he says.
So what about loopholes in credit law that allow companies to work together and provide separate contracts for a single loan service?
The ABC has contacted the Attorney General’s Office, Treasury, Financial Services Minister and Deputy Treasurer Michael Sukkar for a response.
No one has provided comment.
In the meantime, people likely to take out loans they cannot repay remain under pressure to take on more debt.
“Once you get a loan, they come back to you and they’re like, ‘You know you can have more’, and they’ll contact you via email, text. You know you’re pre-approved” , said Ms. Black. said.