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Payday Lenders

Case Study

Maria needed money to register her car. Maria has two small children. One child has a disability which requires regular visits to the doctor. The car is essential. Maria’s sole source of income is Centrelink including family tax benefit. Maria receives no child support from her ex partner. Maria already had an outstanding small loan and a rental contract for her washing machine when she approached BIG SMALL AMOUNT FINANCE COMPANY for a loan of $500. They processed the loan very quickly and reviewed Maria’s bank account statements showing her income and debts. Maria’s car is now fixed but she cannot afford the loan repayments to BIG SMALL AMOUNT FINANCE COMPANY.

If you need a small loan quickly to pay expenses before your next payday it can be difficult to get credit from a mainstream lender. You may be tempted to take out a small amount loan from one of the many “quick-cash” lenders that can be found advertised online or on the street. However be sure to check all your options first because the interest charges and fees on cash loans like these can be extremely high, and there may be cheaper alternatives.

High-cost payday loans are described by lenders in lots of ways, from ‘short term finance’ to ‘cash advances’ to ‘personal finance solutions’. Whatever they are called, payday loans are harmful because they often worsen rather than improve most consumers’ financial positions. You may be thinking that taking out a payday loan is a one-off solution to a temporary problem, there is a great deal of evidence that indicates repeat borrowing is common and necessary for the viability of payday lenders’ business.

Data shows that consumers overwhelmingly use high-cost short term loans to meet basic living expenses. A report done by Consumer Action Law Centre in 2010 found that “22% of users of high-cost short term loans used the money to pay for car repairs or registration, 21% to pay utility bills, 18% for food or other essentials, and 11% for rent.” Read the Report here: http://consumeraction.org.au/wp-content/uploads/2012/05/PayDayLendingReport-FINAL.pdf

Providers of payday loans use direct debit agreements to secure payment of instalments which withdraw the debt repayment as soon as your income or social security benefits are deposited into your account. If you are already struggling to pay your monthly bills paying back a high-cost loan will only cause you additional financial stress and further borrowing, perhaps even sending you into a repeat borrowing spiral of debt.

Recent changes to the National Credit Law have banned ‘short term’ loans ($2,000 or less that you repay in 15 days or less), but ‘small amount’ loans ($2,000 or less that you repay over a longer term, between 16 days and 1 year) are still available and still extremely expensive. Small amount lenders are required to display a warning that notifies you of your options before you borrow money and starting on 1 July 2013 interest rates will be capped at 48%.

If you are in financial difficulty, there are cheaper alternatives to payday loans:

  • If you are having trouble paying a utility bill (electricity, gas, water), contact your provider. Most companies have hardship officers who can help you work out a plan to pay the bill in instalments or apply for emergency utility bill vouchers –Read our Fact Sheet
  • If you are on a low income you may qualify for a no or low interest loan to pay for essential household goods or health items: https://www.moneysmart.gov.au/borrowing-and-credit/other-types-of-credit/no-or-low-interest-loans
  • If you’re eligible for Centrelink benefits, you may be able to get an advance payment on your benefits, with no interest charges – see the Department of Human Services website: http://www.humanservices.gov.au/customer/enablers/advance-payment
  • You may be able to arrange an overdraft with your usual banking institution (but, interest may be up to 20%)
  • If you urgently need help with living expenses, there are charities that may be able to help you with food, transport or chemist vouchers, rent or accommodation, or part-payment of utility bills – see the Salvation Army website or call their national number on 13 72 58: http://salvos.org.au/need-help/financial-troubles/
  • Or Call the Credit & Debt hotline for FREE legal and financial advice: 1800 007 007.