Payday lenders were in news once again last week. Excessive fees, questionable lending practices and often vulnerable clients, means that payday lenders are never far away from controversy.
We have all seen the ads for payday lenders. Need some quick cash? Payday lenders promise quick and easy access to small, short-term loans. Payday loans are generally for small amounts between $100 and $1000 (or sometimes up to $2000) with same day approval. And they are required to be paid back within a two to four week period. However, the speed and flexibility of these loans comes at a cost – high interest rates and associated fees.
Payday loans play an important role in providing credit for low-income earners. Life is unpredictable and sometimes people can’t wait until their next paycheck to meet some of life’s moments. Payday loans are often used to meet expenses related to:
Users of payday loans often say they have no alternative access to funds. So what other finance options are currently available?
Credit card applications require a salary/income (usually around $15k p.a). Fees are still exorbitant with some at around 20% interest, but at least it is calculated over a year rather than for the week or month of the loan. Annual fees may be free, or upwards of $55.
When purchasing big ticket items, traditional bank loans may offer an alternative to appliance rental companies. A personal loan or withdrawing some funds from your mortgage may not be as fast to access as a payday loan but they also won’t come with the high fees associated with payday loans.
Most payday loans companies charge a fee of around 20% of the loan plus around a 4% monthly account keeping fee. Seems high but not completely unreasonable. We all know that some credit card fees can be around that amount. BUT remember that most payday loans are usually issued for between 2-4 weeks. So at best that is 20% PER MONTH rather then a high credit card fee of 20% PER ANNUM.
So if you pay it back within the time frame and you get all you financial affairs in order that may be the end of the story. Unfortunately for many of those who use payday loans, it’s not. They find themselves unable to pay the loan back within the timeframe and then the fees start coming in, thick and fast until the principle of the loan is one of the smaller parts of the outstanding debt. These fees come in the form of default fees or charges and enforcement expenses if the lender has to use legal recourse to gain their money back. In fact there are reports some loans can add up to well over 300% of their original value.
Unsurprisingly, the industry is now under the spotlight with the Government undertaking a 5 month review into fee structures and lending practices.
What is more illuminating is how community concerns will likely lead the reform of the sector. The community views the industry as taking advantage of desperate people. This is why Westpac became the last of the big 4 banks to stop providing funding to payday lenders.
With the sector lending over $400 million to Australians last year, a clean up of lending practices cannot come soon enough.
