17 October 2011
The hidden costs of payday lending
Research shows welfare recipients are using payday lenders to meet regular living expenses and are then trapped in a debt spiral, continuously indebted to one or more loan companies for considerable periods.
The interim report was launched recently by the Assistant Treasurer, Bill Shorten.
The Caught Short interim report investigates the lived experiences of 112 individuals borrowing small, short-term loans from non-bank companies in Queensland, NSW and Victoria.
Launched by Bill Shorten MP, Assistant Treasurer and Minister for Financial Services and Superannuation, Caught Short is an Australian Research Council report by RMIT University, the University of Queensland and the Queensland University of Technology, and funded by National Australia Bank and Good Shepherd Youth and Family Service.
Lead researcher, Professor Catherine McDonald from RMIT, said poverty pervaded the lives of most people borrowing from payday lenders.
"Seventy-eight per cent of research participants were receiving Centrelink support.
"Most strikingly, 37 per cent of income-supported interviewees were Disability Support Pensioners despite that they represent only 18 per cent of Australians who receive one of the Centrelink payments discussed in the research," Professor McDonald said.
The research also found that the most commonly cited reasons borrowers gave why they took out their first loan were all to meet regular, weekly-type needs and expenses.
Significantly, only four people could not remember the events or circumstances which led them to take out their first payday loan.
"The most commonly cited reasons for taking out a loan were to meet regular, weekly-type needs and expenses. Alarmingly, half of the interviewees reliant on a Centrelink payment used the loans to meet regular needs and expenses such as bills, food or to pay another loan," Professor McDonald said.
The report reveals repeat borrowing as a frequent occurrence with payday loans:
- 44 per cent of borrowers interviewed discussed a practice of cycling - how they had immediately taken out a new loan once the previous loan had been paid out;
- 23 per cent became involved in a spiralling process of refinancing the balance of a partially paid-out loan to start a new loan; and
- 25 per cent took out two or more parallel loans from the same or different lenders simultaneously.
This repeat and extended borrowing means borrowers end up paying the equivalent of annual percentage rates between 700 and 1,200 per cent over several months.
NAB Executive General Manager Consumer Product Solutions, John Salamito, said the worrying trend was that most people accessing payday loans borrowed repeatedly and were continuously indebted.
"The prohibitive interest rates and crippling fees result in a debt spiral that is almost impossible to escape. Most people borrowed less than $300, yet the majority had taken out over 10 loans, often more than 50 loans and many felt financially 'stuck'," Mr Salamito said.
"NAB commends the Commonwealth Government's announcement to reform the payday lending market, to help Australians who are financially excluded from mainstream financial services and protect those who are most vulnerable," he said.
Robyn Roberts, CEO of Good Shepherd Youth and Family Service, said it was essential to provide alternatives to protect vulnerable borrowers, but that microfinance programs such as the No Interest Loan Scheme (NILS) should not be seen as a replacement for all payday lending.
"The purpose of microfinance is to alleviate poverty, by helping people accumulate assets; for example, NILS loans are most commonly for white goods such as a fridge or a washing machine.
"With most payday loans used to meet day-to-day living expenses, the Caught Short research shows how different payday lending is," Ms Roberts said.
Professor McDonald said that alternatives to help people access urgent credit were needed. "Interviewees clearly indicated that having access to more frequent and flexible Centrelink payments and services would benefit them enormously.
"To ease the stress of organising their budgets, respondents clearly support the option of receiving their payments weekly and increasing the scope and flexibility of Centrepay deductions to allow calendar-monthly payments," she said.