Payday lending, members beware

Most of us have experienced lean times when cash flow isn’t as consistent as we would like it to be. While some people turn to family and friends for loans to help get them through the tough times, others take a riskier path and rely on payday loans. Payday loans are small cash loans of up to $2000 designed to help borrowers until their next pay day. They are generally used for urgent or unexpected bills and expenses. This could be anything from car repairs to medical costs.

There are more than 1000 payday lenders operating in Australia according to Australian Securities and Investments Commission (ASIC).

These lenders are prominently advertised on television and online. Some target young borrowers, while others appeal to families struggling to make ends meet. They can also be aimed at people with bad credit histories who find it difficult to access loans.

With easy online applications and quick approval processes, these loans are a tempting way to pay off debt. But borrowers need to be wary – payday loans are often not the magic solutions they purport to be.

Payday lenders are often criticised for their high costs which can lead already struggling borrowers into a vicious debt cycle. This is because payday lenders charge fees that are commonly higher than interest rates applied to personal loans or credit cards.

These fees can include an establishment fee of 20% and monthly account keeping fees of up to 4%. And it doesn’t stop there. If a borrower fails to pay back the loan, the provider may be entitled to charge up to 200% of the amount loaned in addition to recovery costs if the lender is forced to go to court to chase up the unpaid loan.

For example, on a loan of $500 you could expect to pay an establishment fee of $100 and an account-keeping fee of $20, making the total repayable sum $620.
ASIC figures reveal payday loans are growing in popularity. The value of loans written in the year to June 2014 was approximately 125% more than what was written in 2008.

Payday lenders advertise their strict guidelines on their websites, but an they don’t always abide by these guidelines. For example, some lenders boast internal policies that prevent loans going to consumers who receive the majority of their income from Centrelink. Yet in a sample of 244 loans, the review found 24% of loans were given to borrowers who received more than half of their income from Centrelink.

There are smarter, cheaper alternatives to payday loans.

If you are having difficulties paying your bills, try to negotiate with the biller. Most companies, including water, gas and electricity providers, have hardship officers who may organise for you to pay in instalments.

If you’re a low-income earner, it’s essential to avoid getting into a debt trap. Instead of payday loans, you may be eligible for the through Good Shepherd Microfinance. Centrelink also offers advance payments for people eligible for benefits.

Consider different financial products such as credit cards or a personal loan. Depending on your situation and your ability to meet repayments, these options could see you paying less in fees and interest.

For those experiencing troubles with payday loans, help is available. Government dispute resolution schemes or ombudsman services can assist people who don’t have access to lawyers. If an industry ombudsman investigates your dispute, you may be asked to provide financial information that will be shared with the lender. The investigation may take months to complete and a resolution is not guaranteed.

This publication was issued by First Super Pty Ltd (ABN 42 053 498 472, AFSL 223988), as Trustee of the First Super superannuation fund (ABN 56 286 625 181). It does not consider your personal circumstances and may not be relied on as investment advice. Content was accurate at the date of issue, but may subsequently change. You should contact us on 1300 360 988 for updated information and to obtain a copy of the product Disclosure Statement.