Payday lending involves high-cost short term loans that are given, in the main, to low and fixed income borrowers to fund recurrent everyday living expenses such as food, utilities and car repairs. Repayments are generally secured through direct debits, which take a first stake in a borrowers income—leaving a low income borrower without enough money for everyday living. In 2010, the industry was estimated at lending over $200m annually to almost 400,000 customers. These estimates are conservative, and it has only grown since then.
Last year, Minister Shorten introduced legislation to Federal Parliament that would cap the costs that can be charged by small amount lenders. Interest rate caps are designed to change the business model of lenders, making very short-term loans unviable and encouraging lenders to offer loans on terms that are more reasonable and affordable
The Government has now floated the idea of doubling the planned interest rate and fee cap, meaning lenders would be allowed to charge effective annual interest rates of up to 288% for a one month loan, and up to 108% for a twelve month loan. Such a generous cap would have a very limited impact on the nature of payday lending. What began as real reform could end up as an endorsement of an industry which sells high cost credit to low income and financially vulnerable Australians.
The Minister’s revised plan is being dressed up as an attempt to strike a compromise between the interests of consumers and lenders but, in reality, it would be nothing less than a capitulation to the industry.
While lenders will make noises about how any sort of interest rate cap is an unnecessary impost on their business, the proposal the Minster seems to be leaning towards is exactly what Australia biggest short term lender, Cash Converters, proposed to a parliamentary committee. It would give lenders what they want and has led to some in the industry privately bragging that the revised model exceeds their expectations.
Adopting Cash Converters’ suggested model would take away any incentive for the industry to change it harmful practices. The original proposal would have had made very short term loans unviable, and that was the point—to encourage lenders to advance loans over longer terms and at lower costs, making them more affordable and appropriate for consumers. It would also have ensured that fewer Australians became trapped in a cycle of repeat borrowing. Repeat borrowing occurs because repayment of one loan reduces a borrower’s income so much that he or she need to take out another loan to pay for day-to-day expenses such as rent, food or bills. This can happen again and again. Short-term loans are rarely used for a ‘once off’ emergency—in fact Cash Converters says that the vast bulk of its lending business is conducted with repeat borrowers.
The revised proposal does more than cast doubt about whether the Government’s desire to protect vulnerable borrowers is genuine—it casts doubt on the Government’s ability to resist powerful, well financed lobbying, and its willingness to listen to smaller organisations committed to the public interest
The Government’s original interest rate and fee cap had been welcomed by consumer groups—it was a softening of what was already in place in some states, but an understanding that this compromise would be effective at reforming payday lending practices led to widespread support. Fifty financial counselling organisations, community support services and consumer groups endorsed a letter to the Minister offering their support. Financial Counsellors, who see the tangible effects of payday loans on a daily basis, marched in support of the proposal.
But it seems what they were up against is an unbeatable combination of money and influence. Payday lenders poured substantial dollars on marketing and hired lobbyists to argue their case with members of Government and the independents—Cash Converters alone hired three different lobby firms.
So how are consumers to respond? We lack the power and influence of large lobbyists, and when plans are floated at a time when the media is busy with leadership speculation our story struggles to get oxygen. There is still an opportunity for the independents to stand up and negotiate a better deal for vulnerable consumers. But should they and the Minster cave to the lenders and introduce ineffective laws, community and welfare agencies will be left assisting even more borrowers who are caught up in credit they simply can’t afford. Unless the Minister wakes up to the impact of this proposal, our chance at reform may have passed us by.
Director of Policy & Campaigns
Consumer Action Law Centre
Gerard Brody is Director Policy & Campaigns with Consumer Action Law Centre. Gerard is a qualified lawyer and has worked as a consumer advocate seeking policy and law reform in a range of consumer sectors, including banking, credit, and utilities.