New research that explores the experiences of people who use payday loans has found that most are using repeat loans to cover basic living expenses like food, rent and bills.
The Caught Short final report investigates the experiences of individuals borrowing small, short-term loans from non-bank companies in Queensland, northern NSW and Victoria.
It also details the perspectives of lenders, regulators, consumer advocates and financial counsellors through in-depth interviews.
The research highlights the frequent and ongoing use of payday loans by participants, with more than half the respondents having taken out more than 10 loans in the past two years.
Among these high frequency borrowers, three-quarters had taken out more than 20 loans.
Many of these people expressed that they felt “caught in a vicious cycle”, of being “trapped” or “stuck” and were continuously indebted to one or more short-term, small-loan companies for considerable periods of time.
The research was funded by the Australian Research Council and conducted by RMIT University, Queensland University of Technology and the University of Queensland and supported by National Australia Bank and Good Shepherd Youth & Family Service.
Lead researcher, Dr Marcus Banks from RMIT’s School of Economics, Finance and Marketing, said: “The report’s two central findings provide the government with a challenging policy problem.
“First, poverty drives the demand for payday loans. Eight in 10 borrowers we interviewed were receiving a Centrelink payment.
“Second, payday borrowing entrenches poverty. Eight in 10 respondents also said their current financial circumstances were no better than before taking out high-cost, short-term loans, with most saying they were in a worse financial position.”
NAB General Manager Corporate Responsibility, Paula Benson, said many of the findings were concerning.
“The report shows the seven most common reasons for taking out a payday loan are to meet basic expenses such as food, rent and bills, rather than to meet one-off unexpected expenses which are most commonly associated with payday lending.
“NAB has led the industry in making banking more accessible and affordable for all Australians.
“We believe that as a major contributor to the Australian economy we have a significant role to play in ensuring that all sections of the community and economy are financially supported; however, the report demonstrates that more needs to be done,” Ms Benson said.
Community organisation Good Shepherd Youth & Family Service, a partner in the research, said it understood that it was important for people to have choices in the credit market, and suggested that the research highlighted that the demand for this kind of credit was very often driven by a genuine need.
“These aren’t people who are borrowing to fund an extravagant lifestyle,” said senior researcher, Tanya Corrie.
“Most are people who are trying to make ends meet and pay for food, utility bills or other essential items.
“The trouble is, fringe lending is the option people use when they feel they have run out of choices. And once stuck in the cycle of debt, their choices become even more limited.”
Co-author of the report, RMIT’s Professor Roslyn Russell, said: “The research confirms that many Australians are financially excluded and do not have access to appropriate and fair credit.
“Only 7 per cent of the research participants had a credit card. While there are efforts from the banking and community sectors to address financial exclusion, more needs to be done.”
A majority of respondents (54 per cent) borrowed amounts of less than $300 from payday lenders, while 21 per cent borrowed between $301 and $500.
The need for these small amounts of money suggests the difficulty for many people to make ends meet.
Dr Banks said: “Parliament is currently considering legislation to reduce borrowing costs and restrict the number of loans a person can take out to eight per year.
“Shielding poor consumers from some excesses in the payday market, however, does not tackle the demand side of the problem.
“We welcome the fact that the Government is canvassing views on how to reduce the reliance on payday loans by over half a million Australians.
“The Caught Short report offers six policy steps to help low-income earners.”
He said they included:
- increasing Centrelink payments and offering the option of receiving payments weekly;
- allowing smaller and more frequent Centrelink Advance Payments;
- mandating that banks inform customers who have incurred a dishonour fee about the existence of fee-free accounts; and
- expanding alternative forms of community-credit provision.
To view the full report click here.