Maxed-out credit cards no barrier for man accessing thousands in payday loans, inquiry hears
Six maxed-out credit cards have proved to be no barrier for one man who accessed thousands in payday loans, a Senate inquiry has been told in newly-released documents.
- ASIC defines a payday loan is a high-cost, short-term loan
- The Senate inquiry has received submissions from both social and government services that signal, at the very least, a need for change
- A Federal department flagged that the withdrawal of financial institutions from short-term lending has fuelled the small amount loan market
The inquiry, launched in October last year, has been told scores of payday lending horror stories, with the Federal regulator’s submission detailing that the practice exhibits “a risk of debt spirals” in more than half of its client files reviewed.
New South Wales organisation Financial Counselling Hunter Valley made a submission which referred to several case studies of people stung by payday lenders.
The service’s manager, Maria Hatch, said in one instance a man — referred to as AB — had an average working income, was married and with a child, had six regulated credit cards with no remaining credit available.
At that point he accessed payday loans.
“He applied for a payday loan and was granted a $3,000 loan, he then applied and was granted a further three payday loans each of $3,000, and then he applied for another payday loan and was granted an $800 loan,” Ms Hatch said.
Ms Hatch said without her service’s help, the man would have lost his wife, child and his job.
She said another client who was escaping domestic violence was granted nearly $15,000 in payday loans.
“She has been granted a payday loan for $6,000 for a car which was allocated to her,” Ms Hatch said.
“She already had another payday loan for $8,500 for a car that was written off in an accident by her ex-partner.”
High-cost, short-term lending
The Department of Social Services has flagged that the withdrawal of financial institutions from short-term lending has fuelled the small amount loan market. (PA Images: Anthony Devlin)
Federal regulator the Australian Securities and Investments Commission defines a payday loan is a high-cost, short-term loan.
The commission says they include small amount loans of up to $2,000 that must be repaid between 16 days and 1 year, as well as loans borrowed over longer periods.
The Senate inquiry is looking at the impact on individuals, communities, and the broader financial system of the operations of payday lenders and consumer lease providers.
There is also a focus on unlicensed financial service providers including ‘buy now, pay later’ providers and short term credit providers.
The Federal Department of Social Services used its submission to the inquiry to acknowledge concerns about payday loans.
“Over the previous two decades, financial institutions have been increasingly withdrawing financial products and services from low-income or other individuals at
risk of financial hardship due to the high cost of providing these services,” the department said.
“This has resulted in a shortage of appropriate and affordable small amount credit for vulnerable individuals, leading to increased financial exclusion for those individuals who are unable to access mainstream financial services.
“In the absence of appropriate alternatives, the small amount loan market, or ‘payday lending’, consumer leasing and other ‘buy now, pay later’ markets have grown to meet this demand.”
Salvo’s alarmed by spike in payday lending
The Salvation Army told the inquiry that the effects of payday lending on families can be disastrous.
“The Salvation Army regularly sees people in marginalized and vulnerable situations with this type of debt,” it said.
“It is one of the most rapidly growing debt types that our community members present with.
“The proportion of community members presenting to our services with payday loans or consumer leases has steadily increased over the years, more than doubling in size
from 6 per cent in 2008/09 to 13 per cent in 2017/18.
“The median values, after adjusting for inflation, trebled from $423 in 2008/09 to $1,383 in 2017/18.”
Legal Aid wants action
NSW Legal Aid also lodged a submission, concerned about vulnerable people being exploited.
It highlighted the case of a woman it has referred to as Rachel.
“Rachel is a young, single, Aboriginal mother and Centrelink recipient from a remote community,” Legal Aid’s submission said.
“She recently left a relationship during which she experienced domestic violence.
Rachel entered seven payday loan agreements with the same provider within a 13-month period.
“The loan amounts ranged from $300 to $1,500,” it said.
“The majority of the contracts were entered the day Rachel completed payment of a previous contract.
“The majority of the contracts contravened responsible lending obligations.
“If Rachel had made all required repayments under each of the contracts, she would have paid more than $2,500 above the total loan amounts.”
The Australian Securities and Investments Commission used its submission to acknowledge a need for change:
“We reviewed 288 payday loan files and found that:
- In 54.2 per cent of files, the consumer had entered two or more small amount credit contracts (with this level of repeat use reflecting a risk of debt spirals); and
- In 7.6 per cent of files, the consumer was in default on another small amount credit contract.”
The senate inquiry committee will hold a second public hearing in Brisbane on January 22.