This fact sheet is for information only. It is recommended that you get legal advice about your situation.
Using a Payday lender is NOT recommended. 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 fees on cash loans like these can be extremely high, and you could end up in a ‘debt trap’.
Maria needed money to repair 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 Quik Bucks, a PAYDAY LENDER for a loan of $500. They processed the loan very quickly. Maria got her car fixed but the loan repayments to Quik Bucks were deducted from her bank account, leaving her without enough money to live on. Not knowing where to turn, she got another loan from another PAY DAY LENDER to cover her family’s food and energy bill. She feels she is now stuck, taking out one loan to pay another, and losing some of her income in fees every time. She had little enough money to begin with!
WHAT ALTERNATIVES ARE AVAILABLE TO USING A PAYDAY LOAN?
Other options to a payday loan are:
- Get a No Interest Loan The No Interest Loan Scheme (NILS) provides individuals and families on low incomes with access to safe, fair and affordable credit for household items, medical and dental. Call 136457 or go to www.nils.com.au
- Emergency Relief Emergency Relief services provides immediate financial and/or material support to people in financial crisis. Emergency Relief services are delivered by community organisations and help people address immediate basic needs in times of financial crisis. Emergency Relief can act as a safety net for people experiencing financial distress or hardship, and who have limited means or resources to help them alleviate their financial crisis. Access to Emergency Relief is free, however, individual service providers may have certain criteria that need to be met in order to access their particular Emergency Relief service. Your local Emergency Relief provider can be found on the Department of Social Services (DSS) Service Directory.
- Make a repayment arrangement on a debt claimed. This often is the best option. Contact the Internal Dispute Resolution department and ask for a repayment arrangement.
- Get a Centrelink advance Go to the Department of Human Services for further information about advance payments.
It is helpful to see a free financial counsellor for assistance. You can call 1800 007 007 to find your nearest financial counsellor.
WHAT IS A PAYDAY LOAN?
A pay day loan used to refer to a loan that was paid back in full on your pay day or over a couple of pay days. In 2013 very short term loans (less than 16 days) were banned in Australia. Instead most pay day lenders in the market now offer loans over longer periods, about seven weeks on average. These loans are very tempting and easy to get, including over the internet or using your phone, but they are expensive and a lot of consumers get into serious financial trouble.
Under the law, an unsecured loan for $2,000 or less for a term of at least 16 days but not longer than one year from a finance company is now called a Small Amount Credit Contracts (“SACC”). These loans have been subject to special rules since mid 2013.
There is a limit to the amount that can be charged for a SACC but they are still very expensive compared to other loans.
The costs are:
- an establishment fee of 20% of the amount loaned
- a monthly fee of 4% of the amount loaned
With a normal loan the amount of interest you are charged reduces over time as you pay it back as you can only be charged interest on the amount outstanding. With a SACC, the monthly fee applies to the whole amount originally borrowed regardless of how much you have paid back.
The equivalent interest rate changes depending on how long you take the loan over but it is usually between 100% and 500% per annum. This is very high, even compared to a credit card.
The payday lender can also charge:
- enforcement costs
- government fees or charges (there should not be any)
- default fees (the maximum amount you can be charged is twice the amount loaned)
Number 3 above is a very important protection if you are struggling to pay your loan. The lender cannot keep adding default fees every week or month. They have to stop at the maximum amount.
If you want to check if you are being charged the correct amount you can use the payday lending calculator at ASIC. If you think you have been overcharged get free legal advice from us immediately.
RESPONSIBLE LENDING – MAKING SURE YOU CAN AFFORD THE LOAN
Since 2010, new responsible lending provisions came into force for all consumer loans. Under these laws lenders have to take certain steps to ensure that:
- consumers get loans that are suitable for their purposes and
- consumers can afford to repay their loans without substantial hardship.
From 2013 additional responsible lending laws apply to SACCs in particular. These rules say that:
- payday lenders cannot take security (eg. a car) for a payday loan
- pay day lenders must obtain and review 90 days of your bank account statements before granting you a loan to make sure you can afford the loan
- a pay day lender has to think twice about giving you a 3rd pay day loan in a 90 day period – the law says that there is a presumption that this means you are already in a debt trap and the lender has to be satisfied that it can show this is not the case before giving you another loan
- a pay day lender also has to think twice about giving you a pay day loan if you have been in default on another pay day loan in the previous 90 day period
- required repayments on a pay day loan cannot be more than 20 per cent of income for consumers who receive 50 per cent or more of their income from Centrelink and
- a warning must be displayed (online and on premises) or given verbally over the telephone (if you are borrowing over the telephone)to advise consumers of the high cost of small amount credit and possible alternatives.
WHAT ABOUT LOANS OVER $2000?
There are also laws that cover loans between $2001 and $5000 which cap the interest rate at 48% p.a. and allow an establishment fee of $400. The term of the loan must be under 2 years. These loans are called Medium Amount Credit Contracts. All other consumer regulated loans are capped at 48% p.a. including establishment fees and any other ongoing fees except default fees and enforcement costs. Beware of non-consumer credit regulated loans or ‘business purpose loans” as there is no cap on the interest that can be charged.
WHAT WILL THE PAYDAY LENDER ASK YOU FOR WHEN YOU APPLY FOR THE LOAN?
The payday lender will ask you for:
- Bank account statements. Do not give the payday lender online access to your statements. This compromises the security of your bank account.
- Proof of income eg. payslips, Centrelink statement
- Details of your living expenses
- Details of other loans
If the payday lender is not asking for this information it is likely they are not complying with their obligations under the law.
WHAT SHOULD YOU DO IF YOU CANNOT AFFORD THE REPAYMENTS?
You need to work out whether:
- you could not afford the repayments when you got the loan, OR
- your circumstances have changed and you now cannot afford the repayments.
WHEN YOU COULD NEVER AFFORD THE REPAYMENTS
Payday lenders are required under the law to assess your financial position and make sure you can afford to repay the loan without substantial hardship. This means if you are having difficulty making the loan repayments from the 1st payment, it may be arguable the loan was unsuitable and should not have been given to you.
If the payday lender gives you a loan that cannot afford to repay this may be a breach of the law. The most common outcome if this breach was shown is that you only need to repay the amount you received in cash less any repayments you have made although this is not guaranteed.
If you believe that you could not afford the loan get free legal advice from us immediately.
WHEN YOU COULD AFFORD THE REPAYMENTS WHEN YOU GOT THE LOAN BUT NOW CAN’T AFFORD THE REPAYMENTS BECAUSE YOUR FINANCIAL SITUATION GOT WORSE
You can request a repayment arrangement on the grounds of financial hardship. All lenders have legal obligations in relation to working with customers in financial hardship. See our fact sheet on financial hardship for details on how to do this.
WHAT DO YOU DO ABOUT THE DIRECT DEBIT ON YOUR ACCOUNT?
Most payday loans are repaid by direct debit. If you are in financial hardship and you cannot afford the repayments you should consider either:
- cancelling the direct debit with your bank (see our fact sheet on how to do this); or
- arranging for the amount to be lower with the payday lender.
You should ring the payday lender and explain you are in financial hardship. It is important that you ensure that your basic and essential living expenses (e.g. rent, food and utilities) are paid before you pay your payday loan. If money is leftover then you should arrange to pay the amount you can reasonably afford. Get legal advice if the payday lender will not agree to the changed repayments.
If you feel you are caught in a trap where you have to keep getting expensive loans to get by, call us for advice. Many people are trying to get by with too little income. Unfortunately borrowing money to pay your every day expenses only makes you even worse off in the long run as more and more of your money disappears in fees.
MY LENDER SAYS THE CREDIT LAWS DO NOT APPLY TO MY LOAN
Pay day lenders have come up with many tricky ways to avoid the law so that they can charge you more, or avoid some of the other rules which should apply to them. If your lender says the law does not apply, call us for legal advice.
Last Updated: October 2018.