Need to know
- The payday and fast loan industry is growing, taking advantage of more vulnerable Australians by charging exorbitant interest rates
- Payday lending gets special treatment to avoid laws that cap interest charges at 48%
- Financial counsellors warn that these loans often lead to debt spirals and make a bad situation worse
They're the signs you may have seen while walking down the street, perhaps in dingy shopfronts. They promise "Fast Cash, Now!" or "Cash in Minutes!", and the high-interest payday loans (or 'fast loans') they're peddling are taking advantage of more people than you might think.
In the digital age, new entrants to the industry are finding more ways to entice financially struggling Australians to take out high-cost, exploitative loans.
New entrants to the industry are finding more ways to entice financially struggling Australians to take out high-cost, exploitative loans
According to Digital Finance Analytics, the payday loan industry is growing, with an extra $1.85 billion in payday and fast loans being written since April 2016.
Outfits such as Nimble have joined more traditional shopfront payday lenders such as Cash Converters, using digital marketing techniques on apps and websites to promise easy 100% online applications, extensive loans paid within 60 minutes, and testimonials to back their service.
But these efforts to normalise expensive loans are unethical, and we advise against taking out any payday loans or fast loan products.
Payday lenders such as Cash Converters and Nimble offer quick cash but also lump you with exorbitant interest rates.
Why are payday loans a rip off?
Australian law says there's a 48% cap on interest when you get a loan or take out a credit card. The average interest rate on a standard credit card is around 19%. So if you think credit cards are expensive (they are), at least the banks don't charge the maximum amount of interest that they're permitted to under the law.
There's a 48% cap on interest when you get a loan or take out a credit card, but the interest charges on payday loans can come to over 400%
Unfortunately, payday lending lobbyists managed to get special treatment to avoid these laws. Instead, the laws around Small Amount Credit Contracts (SACCs) put a complicated calculation in place to allow payday lenders to charge exorbitant and exploitative fees.
When you unpick the calculation, the interest charges on these loans can come to over 400%. In short, whatever you call them, payday loans, fast loans or small amount credit contracts, are a rip-off.
Better ways to get financial assistance
Access to credit is important. If you need to cover yourself for an emergency or an unexpected bill, you should be able to do so, but businesses shouldn't be able to rip you off when you're in need.
While payday and fast loan providers promote themselves as the solution to a tight spot, financial counsellors (nonprofit community workers who help people dealing with debt and money problems) warn that these loans often lead to debt spirals and make a bad situation worse.
There are other options to payday or fast loans:
- The No Interest Loan Scheme is a nonprofit loan provider designed to help people on low incomes access money to cover things like replacing an appliance or medical/education expenses.
- The National Debt Helpline (1800 007 007) provides free financial counselling to Australians dealing with debt and money problems. Often they know about services and subsidies you can access and will help you talk through the problem.
- ASIC has some advice on how to ask your credit, utility and service providers for help.
We don't recommend any payday loan or fast loan products.
How can they get away with this?
In 2016, the federal government committed to acting on these exploitative products, but somehow the payday lending lobby managed to keep their special treatment under the law. New laws are ready to be passed – we just need action.
We've joined the Stop The Debt Trap Alliance to get these important laws passed.
Stock images: Getty, unless otherwise stated.