What is a Payday Loan
Small amount credit contracts (SACCs) are often referred to as payday loans, which is a high-cost loan, between $300 to $2,000, that must be repaid between 16 days and 1 year. These loans are designed to be paid back as soon as you get your next payday.
The Australian payday loan industry
Australia ranks second in the world for household debt levels, sitting just below the Swiss, with a debt a reality for most Australian households.
Household debt in Australia remains constant, with 74% of Australian households holding debt and nearly 800,000 Australian households have been adversely impacted by payday lending.
Most payday loan borrowers do not have access to a credit card or mainstream bank loan, while 60% are hampered by bad credit history. Without any other credit solutions available, payday loans may seem like the only way some borrowers can access the finance they need and the popularity of these loans is soaring for this reason.
The percentage of the personal loan market taken up by non-bank lenders has jumped in the past decade, from 24% in 2006 to 36% in 2018.
The value ($b) of SAAC loans has also tripled in the past decade, from $0.33b in 2006 to $0.89 billion in 2017. Additionally, most small and medium-sized non-bank loans are now taken out online, with 60% of non-bank small and medium-sized loans taken out online in 2018.
There are a wide range of factors that have been suggested to have contributed to the increasing popularity of payday loans including:
➤1. Difficulties for borrowers from lower socio-economic backgrounds to access credit from banks;
➤2. The rise of online lending platforms providing quick and simple access to small loans of up to $2,000 with little effort; and
➤3. Australia’s household debt to disposable income levels hitting record highs and rising levels of mortgage stress putting pressure on homeowners.
Types of borrowers drawn to payday loans
Payday loans attract a large number of borrowers:
➤1. Debt-stressed home owners and renters, with increasing financial pressures, trying to borrow their way out of debt and taking out payday loans to meet their home loan repayments;
➤2. Borrowers who require an emergency source of funding for a one-off expense;
➤3. Disaster victims, who see no alternative to these loans to avoid going broke;
➤4. Disadvantaged or vulnerable borrowers ie. with learning difficulties or littleto-no financial literacy;
➤5. Borrowers with high-paying and low-paying jobs with large debts, and looking for credit offerings to resolve bad credit problems; and
➤6. A single mum working part-time and on Centrelink benefits, who is struggling to balance her weekly budget
Reasons why borrowers are purchasing payday loans
More and more borrowers are relying on these short term loans. There are a number of perceived benefits attached to payday loans, which makes them appealing to borrowers:
1. Quick application process and same-day processing
Most payday lenders operate online and the application process can be completed within minutes and money deposited to your account the same day, making it an attractive option for people after quick access to funds.
2. Loans eligibility can extend to borrowers with bad credit history
Payday loans are accessible to most borrowers, with few eligibility requirements in comparison to banks. Payday loan credit approval criteria does not depend on you credit score, unlike normal personal loans.
The most important thing that payday lenders care about is the need to see is that you’re employed and will be able to pay back what you owe within their timeframes.
3. Access to a convenient 24 hour service online
Payday lenders generally offer a convenient 24 hour service online and payday loans can be applied for at anytime, whether that be in the morning or late at night.
4. Short terms
Payday loans are offered to borrowers for a short period of time. You will usually have to pay off your loan within a few weeks to a few months of receiving the cash.
5. Simple application process
Payday lenders offer simple application processes, online or through smartphones, often only requiring your ID and bank account number/ scanned statements for verification purposes.
6. Low value and easier to pay off loans
Payday loans are small value personal loans less than $2k and typically easier for borrowers to pay off.
Shift from small to medium-amount credit contract (MACC)
Whilst payday loans continue to be popular, it is also noted that there is a trend amongst major non-bank lenders of them shifting away from small loans below $2k to medium size loans between $2-5k.
A lot of the perceived benefits offered for payday loans also exist for MACC loans. Additionally, MACCS are more profitable than SAACs, as sums borrowed are greater, with the ability to capitalize on larger establishment fees, etc.
One of the largest non-bank providers, Cash Converters, reported a 154.6 percent increase in its MACC loan book in 2018, Money3 stated a focus on building up its automotive business through medium-term secured loans.
Credit Corp’s Wallet Wizard reported mainstream lenders (ie. banks) tightening their lending criteria was driving more consumers into its segment of the market. Increased regulator scrutiny and the Royal Commission inquiries are making banks introduce stricter lending criteria and it is harder for borrowers to obtain an unsecured personal loan from banks than it previously was. This trend will continue with revised regulations expected to be released shortly.
Labor’s proposed bill, National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 [No. 2], outlines a number of changes, including requiring equal repayments and intervals, eliminating residual monthly fees charged to borrowers if they pay out their loan early and tougher penalties for non-compliance.
With large numbers of borrowers taking out dozens of payday loans within an annual period, with no credit check, no capacity to make repayments and large debts; stronger regulations and incentives to encourage more responsible lending would go a long way to helping Australia to reduce household debt levels and discourage borrowers from building debt double the amount of what they borrowed.