In the US, there are more payday lenders than there are McDonald’s stores. In the UK, the industry is worth more than $3.6 billion. Annual turnover of the payday loan industry in Australia is just over $1 billion. When compared with our $42 billion credit card market, it’s relatively small but, as financial comparison site finder.com.au points out, it’s ready to explode.
Activity on its website shows payday loans to be one of the more popular credit searches: 77% of all personal loan inquiries on Christmas Day related to payday loans.
“There is clearly a debt crisis in Australia that’s a growing problem and being largely overlooked,” says finder’s money expert, Michelle Hutchison. “More Australians are taking out payday loans and other forms of credit and personal loans and we have more combined debt than ever before.”
Payday loans are designed to meet a cash shortfall and are generally repaid within 30 days, although terms of up to a year are available. They are not new – they were established in 1998 and most of us would have heard of them. But what is new is the number of players and how they are marketing themselves.
If you listened to commercial radio over the festive season, it would have been hard to ignore the fast-cash ads: “Get up to $1000 fast. It’s simple and secure.”; “Get $1200 in 60 minutes.”
These ads didn’t say how much a loan could cost and they were intriguing enough for me to visit the promoters’ websites. Looking at the home pages, you might have thought they were new mainstream lenders. After a few clicks, though, it became obvious they were payday lenders. Their average annualised interest rate was around 292%. Let me be clear here. The market is regulated and there is a cap on fees. But not all payday lenders are the same. Some don’t even like to be called payday lenders – for obvious reasons. Common sense says the market can’t be that big if they all comply with responsible lending requirements. Katherine Lane, principal solicitor at the Financial Rights Legal Centre, believes that the industry still needs to be cleaned up. “How is a lender of last resort that big an industry?” she asks. Her findings suggest there are still a few cowboys and, while there are caps on fees, some are working around the regulations.
So here are my concerns. Costs for a 30-day loan are capped at 24% (a one-off establishment fee of 20% of the loan amount and an account-keeping fee of 4%). Say you borrow $1200 and you’re paid fortnightly; repayments would be two lots of $744. Of that total $288 would be fees.
Who can afford to make an ad hoc payment of $744 each pay day? Let’s not forget you would still have regular fixed expenses such as rent or mortgage repayments. Miss a repayment and things get interesting.
Responsible lenders would stick to the same income-to-outgoing ratios as banks, i.e. 30%. The irresponsible ones wouldn’t. Even if the market is growing, Lane has a point when she questions how lenders of the last resort could be that big an industry.
As finder.com.au points out, it would cost you more to borrow $1000 for a month from a payday lender ($240) than to borrow $2000 for 24 months using an average unsecured personal loan (about $160). Even a cash advance on your credit card is still cheaper than a payday loan: 19.98%pa is the average cash advance interest rate. You lose any interest-free period but, if you drew out $1000 from your card and paid it back in 30 days, it would be about $220 cheaper than the payday loan.
Payday loans are a last resort. I’m guessing if you are applying for one, mainstream lenders have said “no”, although I do understand that some people are happy to pay more for convenience. But be sure to check what other fees apply: for example, dishonour, rescheduling and late-payment fees (daily fees of $7 can apply as well as a $35 dishonour fee). Default fees and charges cannot exceed 200% of the debt.
Be sure to shop around as payday lenders do differ. And remember that if you are in a financial crisis there are other options for getting your hands on some cash without having to resort to a payday lender (see moneysmart.gov.au).