Payday lending reforms proposed to protect consumers

The Commonwealth government has announced proposals to limit the exploitation of people desperate for a small loan.

According to Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, draft legislation would improves the rules around payday lenders

“These proposals seek to stop payday lenders from overcharging consumers who are desperate for money, by introducing limits on the costs they can charge,” Mr Shorten said.

The legislation would place a cap on costs for ‘small amount’ contracts, that is, contracts for $2,000 or less that run for less than two years. Lenders will be limited to charging an upfront fee of 10 per cent of the total amount borrowed and two per cent each month for the life of the loan.

CFA welcomes action on the payday lending problem, although as explained by Fiona Guthrie of CFA member Financial Counselling Australia, our preferred position is to extent the maximum interest rate cap for all credit currently in force in several states.

In announcing that the draft legislation has been released for community consultation, Minister Shorten noted that he has “seen cases where someone who borrows $300 is charged over $100 for a seven day loan, and can then only meet the repayment by not paying other bills, such as rent or electricity. This can lead to a cycle of debt that makes things worse for the borrower.”

Consultation on the draft legislation closes on 5 September 2011.

The changes will amend the National Consumer Credit Protection Act 2009 to reform the regulation of small amount contracts. Other key measures in the draft legislation are:

• A prohibition on refinancing small amount contracts – refinancing increases the risk of a debt spiral as the amount borrowed increases.

• Requirements for short term lenders to disclose the availability of other options – lenders will be required to inform consumers of these options, with internet based lenders required to have a link to the ASIC website at

“For some people, taking out a payday loan might seem like the only answer – but more debt at ridiculously high cost can create more problems than it solves,” Mr Shorten said.

“That’s why the Government wants short term lenders to tell people about other options such as Centrelink advances, No-Interest and Low-Interest Loan Schemes run by community organisations, and the availability of hardship programs with utilities and other credit providers.”

“I have also written to the CEOs of each of the major banks to see if they can do more to assist consumers who are excluded from mainstream finance. Some of the major banks have shown good leadership, but I believe they could all do a bit more to help vulnerable people.

The Government will also release a discussion paper with more detailed proposals to improve access to alternatives to payday loan

Further details of the national consumer credit package, can be found at

One bank that does has developed a response to the problem of financial exclusion is the National Australia Bank which has  welcomed the Commonwealth Government’s announced reforms of the payday lending market.

NAB’s spokesperson Lisa Gray recognises “an urgent need for reform” to ensure prohibitive interest rates from some fringe lenders did not lead to a debt spiral.

“People turn to fringe lenders when they can’t afford to live on their current incomes and can’t access financial services from banks,” Ms Gray said. This sort of borrowing may provide cash for an urgent need, but the prohibitive interest rates and crippling fees can result in a debt spiral that is almost impossible to escape.

The NAB/Centre for Social Impact Financial Exclusion Indicator was launched earlier this year. It found one in seven Australian adults are either fully or severely excluded from accessing basic financial services, such as a transaction account or a small personal loan, leaving them susceptible to predatory lending practices. The study found that 2.65 million Australian adults would have difficulty raising $3000 in an emergency because of a lack of access to basic banking services.

As well as investing more than $130 million in microfinance programs, NAB works in partnership with welfare service Good Shepherd to finance:

  • No Interest Loans Scheme (NILS®) – interest free loans of approximately $1,000 for essential household item, such as fridges and washing machines – offered via hundreds of community organisations nationally;
  • StepUP loans – unsecured personal loans up to $3,000 with 3.99 per cent p.a. fixed interest for approved purposed such as essential household items, second hand car, car repairs and medical purposes; and
  • AddsUP Saving Program – matched savings up to $500.


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