3 Jul 2013

The Credit That Keeps On Costing

By Amy Ripley

Bill Shorten's new payday lending laws came into force this week. They set some limits on predatory lending practices but consumer advocates say poverty is the real problem, writes Amy Ripley

You can’t miss the brightly coloured shop fronts of payday lenders like Cash Converters or the Cash Store. For the one in eight Australians who find themselves living on the poverty line, they can be a source of quick and easy credit.

Payday loans are small short term loans (anything from $50-500) which attract high fees, interest and charges. It’s an often predatory practice that has been targeted by a recent set of reforms championed by Bill Shorten. New legislation came into force this week which will cap fees charged on these loans to a one-off fee and a monthly account keeping fee. This is a positive step but consumer advocates say that these measures do not go far enough.

Last year, a study on payday lending, Caught Short, was published by academics from Queensland University of Technology, the University of Queensland and RMIT. The report found that 80 per cent of borrowers were receiving a Centrelink or pension payment and many reported struggling with physical, psychological and emotional health problems. It also discovered that most borrowers were taking out loans to meet basic expenses such as food, bills, car repairs and rent.

The report, full of stories of desperate choices, is grim reading. The young mother needing money to buy nappies, the disability pensioner borrowing to pay his electricity bill, the Newstart recipient who describes being in hock to payday lenders as “like suffocating in your sleep”.

These kinds of stories are all too familiar to Gerard Brody, the CEO of the Consumer Action Law Centre, a not-for-profit organisation which provides free legal advice and representation to vulnerable and disadvantaged consumers in Victoria.

“Payday loans worsen rather than improve someone’s financial position," he told NM. "They are marketed as a one-off solution to temporary problems – so if your fridge breaks down and you need to get it repaired quickly – but in reality that’s not the way they operate.”

Brody says that consumers often find themselves unable to repay a loan and then take out another loan to cover themselves, becoming trapped in a cycle of debt.

“Repeat borrowing is common and necessary to the viability of the lenders’ business. So you might get out a loan to cover an emergency expense, you have to repay it in 2-4 weeks, plus fees and charges. The repayment is usually timed to leave your account on the same day that your pay or Centrelink benefit arrives. You’re then left with not enough for your following pay period so you’re encouraged to go back for another loan.”

Payday loans have proved controversial in the UK too. Last month, the UK Public Accounts Committee issued a report which was highly critical of the practices and regulation surrounding the UK industry, stating that there was evidence that lenders targeted people with drug, alcohol and mental health problems.

Rob Bryant is the CEO of Money3, a business which provides both small and large loans to people across Victoria. He rejects the argument that lenders are exploiting consumers. He tells New Matilda that Money3 is providing a crucial service for people who can’t access mainstream credit.

“Credit is a basic human right. There are all sorts of people that can’t get credit – doctors, teachers; we’ve even had an orthodontist. We buy time for people. We give them a fair go. If we weren’t there, I think many people would go into bankruptcy.”

Bryant thinks the new regulations will give consumers adequate protection but admits that, longterm, better financial education is the key to improving the lives of those who use his services.

“The industry is confident that the new legislation will help. I think it will provide a blueprint for countries such as the UK. But it’s also time for industry and consumer advocates to start working together to invest in better financial education for those Australians who are, for whatever reason, financially challenged.”

Fiona Guthrie, the Executive Director of Financial Counselling Australia, is sceptical about the view that giving people more money will help them. “The payday lending industry assumes that credit is an answer to financial difficulty. It isn’t. The fundamental problem is often poverty and all that a payday loan will do is exacerbate what was already a difficult situation,” she says.

Guthrie says that there is a range of options available to help those who find themselves in financial difficulties, either through organisations such as Consumer Action or through financial counsellors.

“Financial counsellors can help with things like drawing up a budget, facilitating access to a hardship program of a utility provider or negotiating reduced repayments or even a payment moratorium with lenders. There are also many community organisations that provide No Interest Loans for people on low incomes to purchase items such as white goods.”

As the economy slows down and banks tighten up their lending practices, there’s good reason to believe that payday lending looks will grow in Australia. “This is a highly profitable industry,” says Guthrie. “We expect it to increase, with a particular growth in online offerings.”

According to Professor Greg Marston, a co-author of Caught Short and an expert in welfare policy from Queensland University of Technology, the new legislation is not enough to protect vulnerable consumers.

Marston says that the main problem is not lack of knowledge among low-income citizens about how much the loan will cost but rather the lack of affordable credit options for low-income borrowers. He argues that it is the government’s responsibility to deal with this.

“The government has a responsibility beyond regulating the price of market-based credit products. They have a role in ensuring people have a sufficient income in the first place through supporting decent wages and taking steps to increase social security payments, particularly the Newstart Allowance.”

This is why, says Marston, legislators need to look at the bigger picture.

“What we were trying to do with the [Caught Short] report was understand why demand for payday loans has been growing rapidly in Australia. What we uncovered were clear structural problems, such as inadequate income security payments, spiralling housing costs and increases in the costs of utilities. As such, increased financial education and literacy is not enough.”

Find out about financial counselling in your region by calling 1800 007 007 or visiting Money Smart.

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Posted Wednesday, July 3, 2013 - 23:32

Selling or "hocking"an item to a pawn broker is certainly an unenviable situation to find one's self in.
Not a situation I'd like to find myself in as a borrower or even as a ("impassioned") lender.
when placing a cap on a profit which a pawnbroker should reasonably expect to extract from a situation where an item for which the PB has outlaid ..say.. $50, it's unreasonable to view it in terms comparing it to a bank loan of say 7% over 30-40 years.
The pawnbroker, even when buying outright, is typically required to store those goods and not to expose for sale for at least 10days or so.
I say "typically" because it only applies to a list of certain prescribed goods, including, all electrical, & sporting goods; items of silver or gold or incorporating valuable stones; certain car parts including panels, wheels among them.

The PB must view and document identification: and depending on state:must report all jewelry purchases among other stuff to gov.
Must procure a written statement . from seller to the effect that the goods are not subject to gst because they are personal or domestic or "hobby" goods OR withhold 48.5% $ for the gov in the absence of such statement.

If ANY MEMBER of the public merely "accuses" the PB of being in possession of of goods stolen from them, then the PB is required to immediately withdraw those goods from sale and write a triplicate of such accusation handing 1 copy to the accuser, retain one for self and submit 1 copy to local sergeant of police.

But assuming all has gone well, and there are no accusations made, and in light of the fact that my auto electrician charges me $110/hr and my mechanic $88/hr, or even my barber at about there
then I'd put it to you that (for the PB's business to remain viable) [S]he should not charge ANYTHING LESS than an effective rate of, say, 50% over ANY PERIOD on that transaction in which the PB has lent $50.
The paperwork to merely initiate this transaction will likely take a min of 1/4hour.

The Gov could instead introduce an act for pawn brokers, where by the PB can only buy or lend up to a max of say 20 or 25% of anticipated retail price on higher value items, effectively entering into an equal partnership with the customer who'd later receive a further, say, 25% at time of subsequent resale. And possibly charge a nominal $10 or $20 or more admin fee.
Thereby ensuring the customer gets the benefit of a fair price and professional sales outlet and the benefit of professional valuation included and the PB can still effectively extract a 100% margin.
It would also protect some poor mug from getting milked for his grandfather's medals, or grandma's wedding ring or rare guitar, with the PB on-selling it at say a non-rare 500% mark up.

But worse than that...,,
Why does Bill Shorten stop at those usurious levels by Pawn Brokers, and only complain when banks seek to open on weekends without paying their staff penalty rates.

Why does he now compel us to put even more money into super funds run by real big sharks that have proven unreliable to us expecting ANY profit, thereby forcing us to borrow money with our other hand at the same time from another shark, a bank, at say a "fair 7% Per Year (if all stays "well). Where even a paltry $100 of a home loan over 40 years will compound if calculated daily growing to a whopping (believe it or not) $16,400+.
That's right folks, OUCH.

I don't mean to get religious on you battlers, but that's the reason that the historical figure: Jesus, took a whip to these bastards.

Shorten also has taken steps toward
Cutting red tape from corporate bond market for "mum and dad investors looking to diversify their savings through investments in corporate bonds".

While also pushing for financial advisers here to take out more insurance..
He also took a trip to Israel last year, encouraging our supper funds to invest in companies like Israel's largest insurance group, Migdal, and fellow insurer Clal Insurance Enterprise Holdings, both of whom have large holdings in companies
Migdal---Housing & Construction Holding Co
Clal---Nesher Israel Cement Enterprises Ltd.
which have been black-listed by Swedish and Norwegian Gov Pension Funds because of dominant market stakes in the construction of illegal settlements in Palestine.
In Spite of ..
"Well, what the position of the Labor Party and Labor Government is [is] that we want to see a two state solution... My colleague, the Minister for Foreign Affairs, has said that we want to see a halt to settlement activity." (Julia Gillard, Lateline, 16/6/09)

I don't know, it's all so confusing hey?

Posted Thursday, July 4, 2013 - 16:50

I don't think we can blame the pawn brokers they are only serving a gap in a the free market

as endorsed by both major parties.      If there is ever to be a change from the absolute poverty of so many of our fellow Austrainas and their poor little kids the cahnge has to come from the top where instead of sleeping rough one night a year and boasting about how much money raised for cahrity, heads of organisations relook at the fact that we are not the land of the fair go anymore.


the lead has to be taken by organisations like  the Business Councilof Australia and Australian Industry group and  stop whigeing about how bad business is and look to the flaws in  the free market system.

The opposition that exists towards the governmant doing anything has become entrenched after Thatcher's "no such thing as society" and that is what we are seeing. 

It is time to look at public housing and infrastructure.  However that is really pie inthe sky dreams when the conservatives don't believe in infrastructure (see J Howard's efforts when money was plentiful) and the pr

Of course it would be helpful if the conservatives were more liberal in outlook as Menzies and those who were around when there was consensus from allsides of politics whent he Sydney suburban train system was planned and imoplemented by successive governments.

The big companies reagrd people as a variable cost ( hence so much casulatisation of the work force )  otherwise the banks making bilklions would not sacrifice a few hundred jobs to overseas tor educe costs

Posted Saturday, July 6, 2013 - 09:00

Or conversely, put a cap on salaries.
No man or woman is worth 100x more than us.

Such huge salaries do not succeed in motivating for performance, they do however motivate to lie and steal and even kill. Leaving these banks and other mega-corporations with "plausible deniability".

Posted Sunday, July 7, 2013 - 22:43

I've just come from the treasury ministry website of Shortens...
Here's an extract..
"These proposals seek to stop payday lenders from overcharging consumers who are desperate for money, by introducing limits on the costs they can charge," Mr Shorten said.

The reforms will see Australia's first national cap on costs for 'small amount' contracts. That is, contracts for $2,000 or less that run for less than two years. Lenders will be limited to charging an upfront fee of 10 per cent of the total amount borrowed and two per cent each month for the life of the loan.

"I've seen cases where someone who borrows $300 is charged over $100 for a seven day loan, and can then only meet the repayment by not paying other bills, such as rent or electricity. This can lead to a cycle of debt that makes things worse for the borrower."
Is that right?? Well "I've seen cases where someone who borrows" $1400 from a financial institution for a crappy vehicle is expected to pay $1440 for insurance on that vehicle, as happens to young and inexperienced drivers that take out loans for vehicles.from banks.
And unlike the case with a loan from a Pawn Broker, where the borrower can opt out and just let the PB keep the goods, the borrower from a bank will have to pay the loan out in it's entirety.
The PB, unlike a bank, is at least compelled for his own interest to ensure that the goods are worth redeeming. That the amount borrowed is actually less than the value of the goods goods for which the PB gets tittle. Should the PB fail to do so, then the loss will likely be his/hers.
This is not the case where a bank has loaned money on a "low doc" or "sub prime" loan. Banks are protected from such losses in Australia by bankruptcy laws and also by compelling the borrower to pay loan insurance.
Where a bank has actually bound a "customer"/mug to repay a loan at 110% of the value of the house and that customer fails to fulfill the contract on time, then the bank has the right to sell the house from under them, and the borrower is still bound to continue the payments on any likely balance and not only that, but the bank will also likely sell the house of the borrower's parents or grandparents or siblings as guarantors.

A $2000 loss won't enslave or destroy anyone in Australia Billy, but Indentured Servitude does.

Posted Saturday, June 7, 2014 - 05:22

So whilst I applaud the new laws, they can’t be looked at exclusively. Whether we’ll have a fairer credit system for all Australians remains to be seen following the implementation of amendments to the Privacy Act. Whether Australians will get a ‘fair go’ or find themselves in new hot water – is what we’ll be looking at closely over the next couple of years.