Floodgates for predatory lending will open unless lending laws are tightened, consumer advocates warn
Consumer advocates fear loopholes in credit laws could open the floodgates to predatory lending for millions of vulnerable Australians.
- Experts say that many people seek payday loans when they are in financial need
- But some lenders often charge high fees
- Consumer advocates say payday lenders can circumvent the lending law through “loopholes.”
The focus is on payday lenders, who offer short-term loans to help customers pay the bills before their next paycheck.
Cairns resident Rachel Black, 58, used a payday lender to top up her salary each month.
“You start by borrowing a small amount and then you think you know that’s okay, I can do that.
“I’ll just add $50 if they give it to me. I’ll just add $100.”
She claims that getting a loan is easy and if she can’t afford the repayments, she would borrow from another lender.
“It hurts the most when you’re borrowing an amount that has a huge interest rate attached to it,” says Ms. Black.
“And you pay back almost half of what you borrowed, you know. It takes a long time when you’ve borrowed too much.”
Financial adviser Kylie Holford says Ms Black’s experience is widespread and, in her experience, people seek payday loans when they are already in financial distress.
“Or a lot of people say I actually kind of got it, but I was in such a vulnerable place that all I needed was the money,” she says.
“But what they also don’t understand is that they might have a little idea of some of the fees, but then they don’t understand what happens when they miss the payments and what the impact of the missed payments is. “
How Payday Lenders Circumvent Lending Laws?
Consumer advocates are aware that some payday lenders charge high fees.
Tom Abourizk, policy officer for the Consumer Action Law Center, says it’s also legal under existing credit law.
He says payday lenders can avoid falling under the lending law — and therefore charging high fees — by saying they only engage borrowers for very short periods of time.
This is also the case when they engage clients with two separate contracts – one for the loan and the other for financial services provided.
“The first is called short-term credit exemption, which is an exemption from the credit law that basically says you can charge a fee if you can charge a small fee when your loans are paid back — I think it’s a maximum of 5 percent the loan is provided – then you may fall under an exemption.
“They use a second contract, linked to the contract that satisfies this exception, where they charge their exorbitant fees.
“Essentially, they broke up [the bill] in two.
“And so you get a service where any other lender would do it all in one contract.
“But essentially they split the whole thing into two contracts.”
Proponents are calling for ASIC to act quickly
The regulator, the Australian Securities and Investments Commission or ASIC, is aware that short-term loan providers charge customers high fees.
But Mr. Abourizk says the regulatory wheels are not turning fast enough.
“It’s a really blatant example of serious harm being done to vulnerable people across Australia and it’s taken too long to act,” he says.
So what about the loopholes in the credit law that allow companies to collaborate and provide separate contracts for a single credit service?
The ABC reached out to the Attorney General’s Office, the Treasury Department, the Minister for Financial Services and Deputy Treasurer Michael Sukkar for an answer.
Nobody has commented.
Meanwhile, those who are vulnerable to borrowing that they can’t pay back remain under pressure to take on more debt.
“Once you get a loan, they’ll come back to you and say, ‘You know you can have more,’ and they’ll contact you via email or text message. You know you’ve been pre-approved,” Ms Black says.