Dangers of payday loans as Australian consumers left in loads of debt
The Salvation Army has joined calls for strict payment caps on payday loans which leave customers paying interest rates of up to 400 per cent. SEE THE DANGERS
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Vulnerable Australians are still being targeted with exorbitant interest rates on loans offered by payday lenders, a leading charity warns.
The Salvation Army says many recommendations made at the beginning of the year by two major inquiries into the banking and financial services industries still haven’t been acted on and has joined calls from experts to have strict payment caps to stop financial harm.
Payday loans are often used as a short-term fix, usually up to $2000, and are commonly applied for online. But there’s a catch: they leave consumers paying interest rates of up to 400 per cent.
Financial counsellor Kristen Hartnett said the Salvation Army is still seeing instances where much-needed household items like washing machines are bought for $600 but end up costing $3000 due to high interest rates.
“Even though there were a lot of recommendations, on a day-to-day basis what’s presenting is the same,” she said.
More than 1500 people had come to the Salvation Army’s Moneycare service for financial advice last year and the charity took more than 30,000 calls.
Moneycare head Tony Devlin insists vulnerable and desperate people don’t need a payday loan or a “buy now, pay later” scheme.
“What is needed is financial counselling such as that offered by Moneycare which is holistic in its approach, which focuses on working with the person as a whole and builds long-term financial capability and resilience,” he said.
It comes after experts warned payday lenders should have strict payment caps to stop financial harm.
The Consumer Action Law Centre’s chief executive officer, Gerard Brody, urged the federal government to finally implement laws that limit repayments on payday loans to no more than 10 per cent of someone’s net income.
“It means they are still available in the marketplace for a one-off emergency but you will still have 90 per cent of your income to pay for essentials such as housing, rent, utilities and food,” he said.
“We need to make sure these high-cost repayments aren’t sucking up the income of people who don’t have enough money to live on.”
In some cases people can have up to 60 per cent of their income gobbled up by meeting payday loan repayments.
An inquiry last year into credit and financial services that cause harm included payday loans, but legislation to restrict the amount people are being forced to pay back come payday has not yet been implemented.
Mr Brody said the loans “are stopping people from getting ahead”.
“We’ve had cases where people have had over 60 of these loans over a couple of years and they are reliant, they are living on them,” he said.
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Noorlia Mansor, 43, left an abusive relationship last year and she turned to payday loans to pay to live.
“Within five months I had six payday loans, that was approved when I was homeless and I didn’t have money,” she said.
“I was getting anywhere from a few hundred dollars to almost a few thousand dollars at a time and ended up with a total of $6000 in loans.
“When the fourth payday loan was approved, I was already behind in repayments on the other three loans.”
Ms Mansor is now looking for a job working with a financial counsellor to resolve her debt issues.
A charity which offers financial counselling, Better Place Australia’s chief executive officer Serge Sardo, said by the time clients present to their service “they are in all sorts of trouble, they have loans on top of loans”.
“How can it be sustainable to have a business model that makes money from the most vulnerable, most socially disadvantaged, there is something not right at a policy level,” he said.
“If someone presents for a loan who is on Centrelink or welfare immediately that should raise alarms.”
Of their data, one in four people seek help relating to forms of credit including payday loans.
Some of the well-known payday lenders include Nimble, Wallet Wizard, Cash Converters, Jacaranda Finance, Sunshine Loans and Fair Go Finance.
But Nimble’s chief executive officer Gavin Slater said they were exiting the payday loan sector, and admitted the interest rates they charge on the loans were “very high”.
The Assistant Treasurer Michael Sukkar said they were processing the changes to be legislated relating to small amount credit contracts but they were still considering public submissions.
“The Government is committed to progressing these important reforms which will ultimately improve the accountability of financial product issuers and improve outcomes for consumers,” he said.