The money trap

debt-trapThe payday lending industry has boomed in Australia in less than two decades. Today more than 1.1 million Australians take out a short-term loan each year.

While the industry promotes such loans as convenient, quick and easy finance, the exorbitant interest rates are trapping many Australians in a seemingly never ending cycle of debt.

Nigel Tapp investigates the industry and the work Uniting Church agencies are doing to tackle the problem.

Mary (not her real name) is a single mother in her 40s living in a regional Victorian city. To look at her she appears no different to many other single parents juggling the demands of a teenager on a fixed income.

Money is tight. Mary’s part-time job at a local supermarket is casual and she cannot predict how much, if any, work she will have next week.

Most of the time Mary and her 14-year-old daughter manage to get by, although there are very few luxuries. The car is 15 years old and even the television has seen better days.

Sometimes the only way Mary can make ends meet is just a way into deeper debt – a payday loan.

For months, Mary has been taking out small loans to meet unexpected expenses she has no way of budgeting for – to get her car fixed when it suddenly broke down; to buy a laptop for her daughter’s education and even paying for her extra asthma medication when she lost her inhaler.

Rather than just paying off the loans – never more than $300 at a time – and moving on, Mary fell into the trap of mounting debts as the amount she owed skyrocketed with fees, penalties and other charges. She found herself paying up to three times more than she borrowed in the first place
Before long Mary took out other payday loans to pay off the existing small loans.

The slippery slope quickly became a massive slide, until a financial counsellor stepped in and helped her establish a more manageable payment plan with lenders.

The counsellor also provided Mary with some advice on alternatives to payday loans.

Mary’s story is sadly common in Australia today – this is the real face of payday lending.

The first payday lending outlet was opened on the Gold Coast less than 20 years ago.

In 2014, Australian a report in the International Journal of Social Welfare (IJSW) titled ‘How Australians Experience Payday Loans’ estimated that in 2011 more than 1.1 million Australians (15 per cent of the working age population) took out three small-amount short-term (payday) loans that year.

In Australia the average payday loan is about $340, with more than half of users borrowing between $50 and $300.

Such small amounts are not attractive to regular banks and credit providers, who largely stay out of the market in terms of being direct providers of credit.

But, according to a report in The Finsia Journal of Applied Finance (Issue 3, 2014) the major shareholders in market-leading payday lender Cash Converters International included Australian big four bank Commonwealth. Another big four member, Westpac, is one of two major bank service providers to the company.

Payday loans are predominantly used by people on low incomes seeking to tide themselves over to their next payment – often a Centrelink benefits. But sometimes they are employed, albeit on a wage which does not stretch to meet even the most basic of needs.

On the surface these loans may seem harmless, but it is below the skin where the real danger lurks.

The ‘killer’ of such a credit arrangement lies in the exorbitant interest rate which applies to payday loans and the fact repayments are generally due in line with the borrower’s next payment, wage or benefit.

As an example a loan of $100 would have a maximum loan establishment fee of 20 per cent and an interest rate of 4 per cent. In effect that equates to a monthly interest rate of 24 per cent, or 288 per cent annualised.

A cash advance on a credit card would only attract an annualised interest rate of about 21 per cent, meaning a $300 cash advance would cost $4.94 in interest if paid after four weeks.

While $24 a month may not seem a lot, in the context of a single Newstart allowance of about $520 a fortnight it can be quite a hurdle, particularly if the customer has more than one loan outstanding.

And as the money is deducted as soon as your next payment arrives it can lead to being broke again very quickly.

Hence, many low income earners become trapped into literally living from payday loan to payday loan.

And it is there that the real problem exists, an issue which is concerning many in Australia.

Put simply even in Australia today getting money can be easy. Too easy in fact.

The depressing cycle experienced by many who have become trapped by payday loans is something Lentara UnitingCare financial counsellor Seval Meric sees often in her work.

Ms Meric stressed that a large majority of the clients she sees are not taking out loans for the latest television or electronic gadget. Most are people who can budget but who find their income does not meet even the most basic of needs to the point one unexpected expense throws them.

“Usually clients want money for basic needs – food, utility bills, car repairs, school expenses or medication,” she said.

“They are for day-to-day living expenses. Some people who have addiction issues may find payday loans easy to access and even worse some use them to pay off other (payday) loans. But most just need money for car repairs so they can go to appointments or work or because their electricity is going to be disconnected. Basic needs.”

Ms Meric’s clients aren’t unaware of the pitfalls, such as exorbitant interest rates.

“If there is no alternative and they have a desperate need for the money and a payday loan is the only resort, that is what they are going to do,” she said.

Once clients find themselves on a roller coaster of living from loan to loan it becomes difficult for them to get off without someone going into bat for them.

“I see clients getting loans to pay off loans.”

Ms Meric is also concerned by the requirement of lenders for payments to be made by direct debit or through Centrepay, which means the money is taken from the Centrelink funds of the client before they even see it.

This can lead to clients quickly racking up a host of bank dishonour or overdrawn fees which further eats away at their meagre payments to the point that another loan is the only alternative.

Legislative changes in 2013 were meant to stop lenders from entering into a contract with borrowers who are in default with another lender, or who have had two or more small loans in the previous three months. Ms Meric said that was not the reality.

Ms Meric said Lentara offered community education programs to assist people to understand the dangers of such credit arrangements and raise awareness about alternatives.

She supports microfinance arrangements such as the No-Interest Loan Scheme (NILS) and Step Up Loans.

The fact payday loans are made available virtually straight away, while other loans can take a few days or even a week to organise, increases their attractiveness.

Consumer Action Law Centre Chief Executive Gerard Brody said a recent review by the Australian Securities and Investment Commission (ASIC) found some payday lenders were continuing to flout small amount lending reforms introduced in 2013.

In March ASIC said its review of 288 consumer files for 13 pay day lenders found “particular compliance risks around the test for loan suitability which must be considered when the consumer has multiple other pay day loans or is in default under a payday loan.”

The report also found “systemic weaknesses” in documentation and record keeping.

ASIC Deputy Chairman Peter Kell warned the sector that it was on notice to “improve its practices or further enforcement action is inevitable”.

Recent enforcement action against payday lenders by ASIC has included $19 million in penalties levied by the Federal Court against Cash Store for irresponsible lending and unconscionable conduct.

Mr Brody said the existing business model of payday lenders ‘required’ repeat business from clients, ‘hooking’ them into the recurrent use of high cost loans.

“While lenders look at an applicant’s income they don’t look as closely at outgoings as they are required to.”

He said he understood that many clients saw payday loans as an easy option for them when there were few alternatives.

Mr Brody said there needed to be more enforcement action by ASIC to ensure payday lenders played by the rules. He feels that lenders paid little more than lip service to the requirement to adequately assess the repayment capacity of borrowers.

If you are in financial difficulty, there are cheaper alternatives to payday-style loans such as:

Negotiate with your utility provider

If you are having trouble paying an electricity, gas or water bill, contact your utility provider. Most companies have hardship officers who can help you work out a plan to pay the bill in instalments or apply for emergency utility bill vouchers.

NILS or StepUP loans

If you are on a low income, you may qualify for a no or low interest loan to pay for essential household goods or personal services such as medical treatment.

Centrelink advance payment

Recipients of Centrelink benefits may be able to get an advance payment on their benefits, with no interest charges. The Department of Human Services website can offer more advice (www.humanservices.gov.au/customer/subjects/managing-your-money#a5).

Ask Your Employer For An Advance

You might be surprised by just how willing employers are to help you out in times of need. Many have processes set up for employees who need such help.

It doesn’t hurt to ask, and you could save yourself a lot of fees and charges.

Ask Creditors To Extend A Due Date

Most creditors have processes set up to help you pay them back. After all, they want their money and most will be more than happy to set up a payment plan, as it means they will get paid.

Sell Unwanted Goods

Have a look around your house and see if there is anything you don’t need or don’t use anymore.

You could sell it on websites like eBay or Gumtree or take unwanted goods to a local pawn broker. Be prepared for a low price though as pawn shops are known for offering low valuations.

Sources: www.moneysmart.gov.au, www.moneybuddy.com.au

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