Consumer groups from around Australia are calling on the Federal Government to cap interest rates at 48%. This cap is currently in place in three jurisdictions: New South Wales, Queensland and the ACT. However credit legislation is now a Federal Government responsibility; whether the cap is retained in the next wave of reform to the national credit laws is being debated at the moment.
It’s a “no brainer” for consumer groups, who have always argued that high cost credit is exploitative and unfair. Most Australians are usually shocked to hear that the cap is so high! Most people never, ever pay interest rates of that level.
But these high rates are the bread and butter of the payday lending market. Payday lenders are relative new comers to the Australian marketplace. An unwelcome export from the United States, payday lenders first appeared in Australia in 1999.
Payday lenders offer quick cash, usually for relatively small amounts, until the next payday. Research by CFA member Consumer Action Law Centre shows that most borrowers from payday lenders are on low incomes, and include Centrelink beneficiaries. People most commonly borrow for car repairs and registration or recurrent expenses such as utility bills, food, rent or mortgage payments.
One consumer borrowed $275 from a payday lender for bills. They were required to repay $350 back the next fortnight! This consumer was on a Newstart (unemployment) allowance of $480 per fortnight.
Most payday loans are paid by direct debit with the money coming out as soon as the money form Centrelink comes in. It is inevitable that a borrower will need to borrow again (rollover) .. and that the borrower will end up needing assistance from an emergency relief provider to buy food. Each week the borrower is short $75.00 – the amount of the extra payment demanded by the lender. The annualised interest rate for this loan is 709%. This is a long way above 48%!
People accessing payday lenders are often already in debt and struggling to pay their bills. Providing more credit is not a logical response. You can’t borrow your way out of financial hardship.
One of the fundamental drivers for the growth in payday lending is that Centrelink benefits are at subsistence levels – consumers simply don’t have enough to make ends meet. But there are other policy changes that could also help. Suggestions for reform include:
- The free bill paying system offered by Centrelink could be expanded to include car registration – with the cooperation of state governments,.
- Utility hardship programs need to be more widely available.
- And we need to increase access to free and independent financial counsellors, so that consumers get the best advice about their options when they have bills they can’t pay.