Payday Lenders: The Dark Truth Is We Need Them, But It Doesn’t Have To Be This Way
The post-GFC economy may have poured sand into the gears of many companies, but one industry is booming: payday lenders.
In fact, over the past 10 years, the demand for these lenders has increased 20-fold, offering small loans to desperate people in return for mind-blowing interest payments.
The lifeblood of this industry is financial stress and lately has provided a lot of it.
The percentage of Australian households facing financial difficulties increased from 23.5% in 2005 to 31.8% in 2015.
No one in good health ever takes out one of these loans.
A $ 300 payday loan with a four month repayment period will cost a borrower $ 408 to repay in full. In comparison, an average credit card with an 18% interest rate costs $ 305 to pay off over the same period.
Lenders will typically schedule their repayment dates to coincide with an individual’s salary or income allowance payments, leaving people without enough money to cover rent, food, or other basic expenses. This easily increases the likelihood of needing an additional loan.
Nasty world of payday loans
A 2012 study estimated that around 1.1 million Australians take out, on average, three to five loans per year. It is estimated that 40 percent of payday loan clients take out more than 10 loans per year.
Cash Converters has long dominated the payday loan market after opening its first Australian store in 1984. “Cashies” has been the subject of several major ASIC investigations and was forced to pay back 10 consumers last year. , $ 8 million in fees.
The market is vibrant, however, with dozens of new online payday loan services emerging that aggressively advertise those who might have been too ashamed to show up in person at a store front.
It is also now common practice for payday lenders to sell the data of people who have been turned down for a loan to other riskier payday loan providers.
All in all, we’re talking about a nasty world that most Australians are happy not to have to think about.
One in five does not have access to emergency money
But there is one grim truth about payday lenders that trumps all others: They provide a much needed service.
Twenty-one percent of Australian households have no way of accessing $ 500 in an emergency.
It turns every car breakdown, sore tooth, broken appliance, or sick child into a financial disaster.
Payday lenders provide a quick and easy way to access needed cash, with few limits on who can access loans and no restrictions on what they can do with them. The application process is relatively anonymous and the refund process is easy to understand.
Nasty as the world of payday loans is, the answer cannot be to just suppress it.
An alternative loan scheme
Fortunately, the government has a much better option at its disposal: to enter the market.
A public social emergency loan program would allow all Australians earning less than $ 100,000 to access a low-interest loan of up to $ 500 with quick approval. A maximum of two loans per person per year would be allowed.
There would be no additional requirements beyond loan eligibility, so access to funds could be arranged electronically.
This is because, unlike Cash Converters, the government controls your money through the tax and social system. So he has some sort of assurance that he can get his money back, making painfully high interest unnecessary.
The government only has to charge the bond rate plus a minimal administration fee to cover the costs. At present, that figure would be less than 3 percent per year.
Which leads to a major sweetener for the introduction of such a regime: it would be neutral in terms of income.
A modest cost for a huge impact
The latest McKell Institute report modeled this. If 35% of the 8.3 million eligible Australians immediately took out a single annual loan of $ 500, the size of the program would be around $ 1.45 billion at any given time.
But this would only be a modest “balance sheet” impact. Large rating agencies like Standard & Poor’s and Moody’s would be more likely to note the positive impact on public finances of less reliance on social assistance.
It is true that government-backed options for short-term loans already exist. Centrelink advances are possible and an interest-free loan program is also offered. But neither offer the speed, convenience, versatility, and anonymity of a true social emergency loan program. Hence, payday lenders continue to thrive.
But inequalities and poverty are issues that must be tackled. A government emergency lender wouldn’t do it alone, but it could mitigate the volatility that we know exacerbates real poverty.
A social emergency loan program would provide millions of people with a new avenue to avoid the vicious spiral of payday lenders.
Sam Crosby is Executive Director of the McKell Institute. Richard Holden is Professor of Economics at UNSW.