New payday lending protections welcome, but…

… lenders get a back door to charge more fees

This week marks the introduction of new consumer protections in the payday lending industry. Payday lenders—which lend small amounts of money to low-income Australians at huge interest rates—are now restricted in the fees and interest they can charge and are now required to take extra steps to ensure repaying a loan won’t cause the borrower financial hardship. But consumer advocates remain sceptical that new protections will result in meaningful change and have slammed the Federal Government’s eleventh hour decision to allow borrowers to be charged fees for the processing of direct debit repayments.

‘Our team of financial counsellors and consumer lawyers see the harm caused by payday loans day in, day out. The introduction of new consumer protections may offer some respite, but we’re not convinced we’ll see the change consumer advocates have been waiting on for years,’ said Gerard Brody, CEO of Consumer Action.

‘The Government’s initial proposal to cap interest rates had real merit. It would have forced change in 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. But in the face of heavy lobbying from the payday lenders, the Government doubled its proposed interest rate cap and set it at the level proposed by Cash Converters—Australia’s biggest payday lender.[i] The fact that we’ll still see annualised interest rates of up to 240 per cent will be seen by most Australians as grossly unfair,’ said Mr Brody.

Consumer Action believes the Government’s last minute decision to allow payday lenders to pass on fees for processing direct debits is another sign that the interests of well financed payday lenders are being put above the calls of community legal centres and financial counselling organisations around Australia.[ii]

‘We fought for a cap on the fees and charges lenders could levy and we thought that’s what the Government had delivered—albeit at an industry friendly level. Now we find that they can add a bit more cream to their margins,’ said Mr Brody.

‘Lenders often set up direct debits so that they withdraw money from the borrower’s account on their pay day. This means that the lender get its money before the borrower has had a chance to allocate sufficient money for groceries, rent, medicine and utility bills. It puts borrowers in a perilous position and, sadly, they often go back to the lender for another loan just to meet their living expenses.

‘There are a number of new consumer protections now in place, but at the end of the day the Government seems to have gone out of its way to accommodate the demands of payday lenders and that has come at the expense of vulnerable Australians who can least afford to be paying a premium for credit.

‘The community sector can’t afford to run adverts in marginal seats like the payday lenders, but what we do have is evidence of the damage payday loans cause—real life cases where repeat use of payday loans has brought people to breaking point. Government and industry can be assured that if these tragic cases continue under the new regulatory framework, we’ll be knocking on their doors and fighting until we get meaningful reform,’ said Mr Brody.

Consumer Action has also released an infographic that shows why vulnerable Australians trying to make ends meet for their families fall into a pattern of repeat borrowing and how, even under the new laws, a single loan can push them into the red.


Irresponsible payday lenders


[i] From 1 July 2013, fees charged on small amount loans less than $2,000 are capped (that is, limited to a maximum amount). Credit providers can only charge you the following fees:

  • A one-off establishment fee (of not more than 20% of the loan amount)
  • A monthly account keeping fee (of not more than 4% of the loan amount)
  • A government fee or charge
  • Default fees or charges (the credit provider cannot collect more than 200% of the amount loaned if you default – that is, fail to pay back the loan)

[ii] In late June 2013, the Australian Securities and Investments Commission issued a class order permitting lenders to collect direct debit processing fees, in addition to the above fees. It is understood that the Government will enact further regulations to give effect to this:$file/ES-co13-818.pdf