ASIC flags payday lending concerns once COVID-19 fiscal stimulus dries up

More Australians will likely turn to high-risk payday loans when the government’s coronavirus stimulus measures run out in September, Australia’s corporate regulator has warned.

But consumer advocates believe a surge in payday borrowers could prompt thousands of Australians to enter catastrophic ‘debt spirals’ and they urged the Coalition to avoid the so-called ‘cliff’.

ASIC commissioner Sean Hughes told the COVID-19 select committee hearing on Thursday that payday lending rates would be “very much on our watch” in September.

“We are taking a proactive stance in relation to [payday lending because at] the end of the various support programs, we think there will likely be an increase in utilisation of payday lending programs,” Mr Hughes said in response to questions from Labor’s Murray Watt.

What are payday loans, and why are they so dangerous?

Payday loans are capped at $2000, are short-term, high-interest and are offered by non-bank lenders.

Typically, they require fewer credit checks and financial security assessments than major lenders before an agreement is signed.

Non-bank lenders can charge a maximum of 20 per cent of the payday loan amount for ‘establishment fees’, and monthly fees of 4 per cent.

Expressed as an annual percentage rate (APR), loans can charge Australians in financial distress interest rates as high as 407 per cent.

For a customer endeavouring to pay off a $2000 loan over 30 days, they would be required to repay $2480 – the equivalent of two fortnightly repayments of $1240, according to MoneySmart’s calculator.

Consumer Action Law Centre policy officer Patrick Sloyan told The New Daily payday loans are a “recipe for disaster” when so many Australians have entered financial hardship for the first time.

“Rip-off consumer leases and exorbitant payday loans are not essential at a time like this,” Mr Sloyan said.

“Treasurer Josh Frydenberg should be taking steps to ensure these businesses aren’t taking advantage of issues people are dealing with because of COVID-19.”

Legislation has stalled on the Small Account Credit Contract (SACC) Bill that would protect borrowers from unethical lenders.

The Coalition’s promises to clamp down on unethical lenders have also stretched back to 2017 after the public was consulted on draft legislation.

According to the Stop The Debt Trap Alliance – which consists of more than 20 consumer advocacy groups – around 15 per cent of Australians who commit to a payday loan become trapped by debt.

Struggling Australians can easily be sent into ‘debt cycles’

Anglicare Australia executive director Kasy Chambers said payday lenders typically target disadvantaged households through television and SMS advertising and time their messaging around income and welfare payment dates.

National Debt Helpline senior financial counsellor Claire Tacon told The New Daily payday lenders can also lull vulnerable Australians into purchasing multiple costly loans.

“I had a call from an elderly lady who was struggling to afford her living costs, with her sole income the aged pension, and she was required to move from her unit and had no money to pay for a removalist or bonds, so she took out a payday loan,” Ms Tacon said.

“Because she had no spare money and was struggling to survive, she couldn’t pay it off.

“So her lender offered to roll the loan into a new payday loan, and she ended up in this cycle over six months where she just simply didn’t have enough money to live on.”

Anglicare’s Ms Chambers said she holds “deep concerns” a “perfect storm” could spark a flood of payday loan requests.

And while the Morrison government provided $200 million in extra emergency relief to charitable services including Good Shepherd (which provides no and low-interest loans to struggling Australians) in March, that system is not capable of shouldering the anticipated demand.

“When JobKeeper runs out and their employer may collapse due to financial strain, people could go from $750 a week to suddenly receiving nothing, and most households would do whatever it takes to keep a roof over their head,” Ms Chambers told The New Daily. 

“There are regulations the government could enforce [against payday lenders] but also, it’s about removing that industry’s market.”

She said those measures should focus on keeping JobSeeker at its current rate of $1100 per fortnight and staggering the phaseout of JobKeeper, mortgage repayments and rental moratoriums.