By Dr Therese Wilson, Deputy Head of School, Learning and Teaching, Griffith Law School
Payday loans are small, short-term loans, usually of two to four weeks in duration, which are said to ‘tide people over until payday.’ Consumer advocates have expressed concerns for some years now regarding the harms caused to vulnerable consumers as a result of accessing payday loans.
The main concerns tend to be around (1) high cost; (2) loan rollovers which see people trapped in a debt spiral from which it is difficult to escape; and (3) a failure to assess a borrower’s capacity to repay the loan on time and without financial hardship.
Between 2010 and 2013 under the National Consumer Credit Protection Act 2009 (Cth) (“NCCPA”) these loans were subject to an interest rate cap of 48% per annum however it seems that a number of payday lenders may have sought to avoid this cap on cost by charging ‘administrative fees’ or ‘deferred establishment fees’ in addition to interest rates.
Maurice Blackburn has recently concluded a settlement agreement arising out of a large class action that it initiated against Cash Converters for seeking to avoid the interest rate cap by charging ‘deferred establishment fees.’
The regulation around payday lending under the NCCPA changed in 2013 in an effort to more comprehensively address the three main concerns listed above.
The interest rate cap is now more generous to the lenders (but, according to them, more realistic) in that there can be an establishment fee of 20% of the credit amount and a monthly fee of 4% of the credit amount. This would amount to a rate of 68% for a 12 month loan, but clearly a much higher annual percentage rate on a shorter term loan, for example on a one-month loan, 24% for that month which translates to an annual percentage rate of 288%.
Loan rollovers occur where a borrower cannot repay a loan on time and so it is ‘rolled over’ upon payment of an additional establishment fee. This can lead to borrowers paying large amount in establishment fees and interest over long periods of time, without making a dent in the principal amount owed.
To address the question of loan rollovers, the regulation now provides that a loan will be presumed to be unsuitable for a borrower (and therefore in breach of the regulation) if the borrower is already a debtor under two or more other small amount credit contracts at the time of applying for the loan. This should mean that loan rollovers are no longer offered to borrowers.
The question of loan suitability is addressed under the NCCPA by requiring lenders to assess suitability of a loan and a borrower’s capacity to repay. A lender must not enter into a credit contract with a borrower without first making an assessment as to suitability.
While these regulations should work to prevent the key harms of payday loans, the effectiveness of these regulations will depend upon effective enforcement. The Assistant Treasurer, Josh Frydenberg has announced a review of the laws relating to payday loans and it is hoped that effective enforcement is one of issues to be considered.