Reforms to Payday Lending
People desperate for a small loan to replace a broken household appliance or tide them over until their next pay packet will have more protection from inappropriate lending practices, following the release of draft legislation that improves the rules around payday lenders.
The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, today asked stakeholders for comments on a series of reforms to protect borrowers who use payday lenders.
"These proposals seek to stop payday lenders from overcharging consumers who are desperate for money, by introducing limits on the costs they can charge," Mr Shorten said.
The reforms will see Australia's first national cap on costs for 'small amount' contracts. That is, contracts for $2,000 or less that run for less than two years. Lenders will be limited to charging an upfront fee of 10 per cent of the total amount borrowed and two per cent each month for the life of the loan.
"I've seen cases where someone who borrows $300 is charged over $100 for a seven day loan, and can then only meet the repayment by not paying other bills, such as rent or electricity. This can lead to a cycle of debt that makes things worse for the borrower."
The changes will amend the National Consumer Credit Protection Act 2009 to significantly reform the regulation of small amount contracts. Other key measures in the draft legislation are:
- A prohibition on refinancing small amount contracts – refinancing increases the risk of a debt spiral as the amount borrowed increases.
- Requirements for short term lenders to disclose the availability of other options – lenders will be required to inform consumers of these options, with internet based lenders required to have a link to the ASIC website at moneysmart.com.au.
"For some people, taking out a payday loan might seem like the only answer - but more debt at ridiculously high cost can create more problems than it solves," Mr Shorten said.
"That's why the Government wants short term lenders to tell people about other options such as Centrelink advances, No-Interest and Low-Interest Loan Schemes run by community organisations, and the availability of hardship programs with utilities and other credit providers."
"I have also written to the CEOs of each of the major banks to see if they can do more to assist consumers who are excluded from mainstream finance. Some of the major banks have shown good leadership, but I believe they could all do a bit more to help vulnerable people."
The Government will also release a discussion paper with more detailed proposals to improve access to alternatives to payday loans.
The Government has been consulting with the industry and consumer representatives in the months leading up to these announced changes.
"This draft legislation continues the Government's delivery of the National Credit Reforms, and our commitment to protect and improve the position of vulnerable consumers," Mr Shorten said.
"I encourage interested Australians to participate in this consultation and provide their views on the measures outlined in this draft legislation."
Further details of the national consumer credit package, can be found at www.treasury.gov.au/consumercredit.
Consultation on the draft legislation closes on 5 September 2011.
Alternatives to Payday Lending
Short-term small amount loans are commonly used to pay expenses where lower cost alternatives exist. The table below sets out the alternatives to payday lending that may be available to consumers who currently use payday loans.
Table: Lower cost alternatives to payday loans
|Expense||Possible Lower cost alternatives|
|Utility bills||Centrelink advance and Utility provider's hardship policies|
|Vehicle repairs & registration||LILS and Centrelink advance|
|Mortgage payments||Lender's hardship policies|
|Other essentials||NILS & LILS, and Centrelink advances|
Consumers who are considering using a payday lender can explore the following alternatives:
- Those borrowers who are in receipt of Centrelink payments can obtain advances on their Centrelink payments.
- No interest loans –for people on low incomes who have a Centrelink Concession Card, NILS provides loans of up to $1200 (or more in special circumstances) to purchase essential household items. Consumers can locate their nearest Good Shepherd Accredited No Interest Loans provider by checking the following website: http://www.goodshepvic.org.au/microfinance
- Low interest loans – People on low incomes may be eligible for loans of between $800 and up to $3000 through community providers across many parts of Australia. The loans are available for personal, domestic or household purposes such as fridges, cars, computers, furniture, medical expenses and house repairs. Consumers can locate their nearest Good Shepherd Accredited Step-Up Loans provider by checking the following website: http://www.goodshepvic.org.au/page/98
- Negotiating with existing creditors – Consumers can obtain independent free advice on the options to address their financial problems through financial counsellors. They can find their nearest financial counsellor by ringing the free hotline on 1800 007 007 from 9:30am to 4pm, Monday to Friday.
- Seeking hardship relief with a utility provider - Consumers having trouble paying a water, phone, gas or electricity bill, contact your utility provider and ask to speak to 'hardship' officers who can help them work out a plan to pay their bill in instalments.
As part of these reforms the Government has also been examining ways to make these alternatives more accessible to consumers, and will be releasing a discussion paper in the next 3 months, with more detailed proposals.
In addition the Australian Government's Financial Management Program provides around $335 million over three years to support a range of initiatives to build financial resilience and wellbeing for vulnerable people and those most at risk of financial and social exclusion, including those using pay day loans:
- Emergency Relief services support people to meet their immediate needs in times of crisis.
- Funding is provided to community organisations to provide access to small forms of credit including no and low interest loans, matched savings schemes and the No Interest Loan Scheme (NILS®) which offers small zero interest loans for people on low incomes for the purchase of essential household goods.
- The Community Development Financial Institution pilot provides one-off business development grants to community finance organisations that offer fair and appropriate financial products and services aimed at disadvantaged Australians.
- The new Household Energy and Financial Sustainability Scheme will provide around $30 million over four years to support low-income households experiencing difficulty meeting and paying for their energy needs by improving their energy efficiency and financial sustainability.
- To assist those with long term financial and debt issues Commonwealth Financial Counselling is available to help address financial problems and assist people to make informed financial choices.
Background on Payday Lending
Short-term small amount lending typically refers to loans of between $200 and $2,000 that must be repaid within a short period of time, such as by the borrower's next payday.
This type of lending is subject to caps on costs in the Australian Capital Territory, New South Wales, Queensland and Victoria under existing State and Territory legislation (that have remained in force pending consideration of this issue by the Commonwealth in Phase 2 of the National Credit Reforms). The caps are not consistent; for example, the Victorian model only caps interest but not fees, while the New South Wales approach is to include a broad range of fees in the costs to be included in calculating whether the cap has been exceeded.
Approximately 40 to 49 per cent of short term customers have an annual income of less than $24,000, and between 50 to 74 per cent of short term customers have an annual income of less than $36,000.
Consumers commonly use the credit provided under a short term loan to meet basic or essential expenses such as utility bills, food, rent, and car repairs and registration. There is very little use of short term loans for discretionary spending purposes.
The use of short-term lenders can have the following adverse consequences for borrowers:
- Consumers with very low incomes lose the opportunity to accumulate savings, and remain dependant on government benefits (where they are in receipt of such benefits).
- Consumers with slightly higher incomes can end up with very large debts which can reduce their standard of living or end up in them going bankrupt.