Payday loans are debt traps for millions of Aussies: report

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These “predatory” loans were taken out by around 1.77 million Australian households and generated a net profit of around US$550 million for the lenders.

Payday Loans (also called Small Amount Credit Arrangements or SACCs) are expensive quick loans of up to $2,000 for a period of 16 days to a year.

The report found that one loan can quickly become multiple, with corresponding annual interest rates ranging from 112.1% to 407.6%.

The popularity of the loans is attributed to digital platforms: a decade ago, only 5.6% of payday loans were originated online.

By the end of 2019, that number is expected to reach nearly 86%.

Meanwhile, the number of women taking advantage of payday loans has increased from 177,000 in 2016 to 287,000 in 2019, of which 41% are single mothers.

The report was released today by the Stop the Debt Trap Alliance, a coalition of over 20 consumer groups.

Gerard Brody, CEO of Consumer Action and spokesman for Allianz, said the research was commissioned to examine the true harm of payday loans.

“The damage caused by payday loans is very real and this latest data shows that more Australian households are at risk of spiraling into debt,” Brody said.

“Meanwhile, predatory payday lenders are benefiting vulnerable Australians by an estimated $550 million in net profits in the last three years alone.”

Consumer groups call for reforms

It has been over four years since Assistant Treasurer Josh Frydenberg initiated the SACC review and the government accepted the recommendations of that review three years ago.

The Alliance wants these recommendations to be translated into law before Parliament closes the year’s session.

“Prime Minister Scott Morrison and Treasurer Josh Frydenberg have been very tough on big banks and financial institutions, according to the Financial Services Royal Commission,” Mr Brody said.

“Why are they letting payday lenders escape legislative reform when there is broad consensus in the community that stronger consumer protections are needed?

“The consultation phase for this law has ended. Now is the time for the federal government to do its part to protect Australians from financial harm and bring these changes to Parliament as a matter of urgency.”

In a statement issued in September, Deputy Treasurer Michael Sukkar said the government was pushing change.

“We recognize the need for reform in these areas and that reforms need to find the right balance to improve consumer protection while ensuring that these products and services can continue to play an important role in the economy,” Mr Sukkar said.

What Makes Payday Loans So Dangerous?

Payday loans cannot exceed $2,000 and have a maximum fee of 20% at loan origination and a monthly fee of 4%.

If you compare their fees credit cards and bank loans, you can pay off over $170 more in fees in just three months with a payday loan.

payday loan Credit card Bank
sum borrowed $600 $600 $600
duration of the loan 3 months 3 months 3 months
Total Charges and Corresponding Interest Charges $192 $19.07 $13.04

Note: The cost of payday loans are calculated using the legal cap; Credit card cost at 18.97% APR (average Platinum deck); The bank loan cost is calculated at 12.99% APR (typical bank interest rate).

The report found that payday lenders tend to target vulnerable households, helped by easy access to digital platforms.

In the analysis, financially strained households are defined as those that generally “manage” their current financial situation, for example by taking out short-term loans from family or friends, or juggling multiple credit cards.

Financially distressed households are defined as households that fail to meet their financial obligations when they are due, exhibit chronic repetitive behavior, and are more likely to receive social assistance.

From 2016 to 2019, the number of financially stressed and distressed Australian households on payday loans increased to 310,913.

The growth has been said to be of particular concern as these people will be persuaded to take out expensive loans to meet an immediate need, inevitably leaving people stuck in a debt trap.

Number of households with payday loans

Source: consumer protection

Which State Has the Most Payday Loans?

According to the report, the Victorians lead the nation in terms of net growth in households using payday loans and the value of loans taken out.

Loans worth $24.7 million are made in Victoria each month, followed by New South Wales with $22.7 million.

Of the 509,000 households that took out payday loans between 2016 and 2019, approximately:

  • 148,000 came from Victoria,
  • 136,500 from New South Wales,
  • 82,500 from Queensland,
  • 54,500 from Western Australia.

Payday loans are also growing rapidly in Western Australia and Tasmania, with these households posting the highest growth rates from January to July this year at 13.5% and 15.5% respectively.

Average Value of New Payday Loans Per Month by State ($M)

Payday loan value

Source: consumer protection

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