Payday loans had a pretty bad name. In many cases, deservedly so. They charged enormous interest because they gave credit to our poorest families. And they often had to chase the most vulnerable for repayment.
This week, Cash Converters was fined $1.35 million and ordered to refund $11 million to customers after the Australian Securities Commission found they issued unsuitable small loans to 118,000 online clients, according to The Sydney Morning Herald.
After numerous government inquiries, the industry has decided to go through a rebranding exercise. Payday loans are now called Small Loan Credit Contracts. Much friendlier. But are they any use?
Their new industry body has issued statistics and created a website with the rather fetching name: smallloansbigneed.com.au. The average Small Loan Credit Contract is around $500 over 117 days. Additionally, over $1 billion of consumer credit was given in the form of SACCs. That is a massive amount of credit that vulnerable people wouldn’t normally have access to.
There is no doubt there is a market for these loans. A new report released by the Australian Council of Social Service (ACOSS) last month revealed that poverty is growing in Australia, with an estimated 2.9 million people or 13.3% living below the internationally accepted poverty line.
In fact, 17.4% of all children aged under 15 in Australia are living below the poverty line. That is an increase of 2% in the last decade. Astounding, isn’t it?
These people are obviously highly unlikely to have any savings to draw upon to pay for a broken down car, a medical bill, a broken fridge, or a forgotten electricity bill.
When faced with these financial emergencies, they often turn to a Small Loan Credit Contracts for a quick fix solution.
However, there are significant risks and negatives for people accessing SACCs. It is crucial that you repay a payday loan as soon as possible.
Many people get into trouble with these types of loans when they are unable to quickly repay the debt. If you can’t repay the loan at the end of the term, you’ll be charged expensive additional fees.
It’s very costly to be stuck in a payday loan cycle – sorry, we mean a Small Loan Credit Contract – for a long time and can lead to larger financial problems.
These loans are also much more expensive than other methods of borrowing money. If all goes well, you are likely to pay 25% and 4% a month. But that can balloon as the term goes on. In most cases the annual percentage rate on a loan averages about 400%, or even as high as 5,000%pa.
Annual percentage rates for credit cards can range from about 9% to 30%, and personal loans generally have lower rates than credit cards.
Paying interest at these rates can mean that these vulnerable people may never get out of the debt cycle. So if SACCs are so expensive, how else can you prepare for financial emergencies?
You can’t always predict an emergency, but you can be prepared. Ideally, you should keep enough money to cover your household expenses for two months or more in a savings account. If this goal is too high, aim to save at least the amount of one pay cycle. It is also a good idea to have a credit card available for unexpected costs.
Here are a few ideas on alternatives to Payday Loans:
- Negotiate a payment plan with your credit by explaining your financial hardship. Banks, credit card companies, and utilities providing have departments with the sole purpose of handling these requests.
- Ask your employer for an advance in your salary.
- Seek credit in the form of personal loan or credit card from a traditional lender.
- Check with your bank if you can have an overdraft on your bank account.
- Ask a friend or relative to lend you the money.
- Ask your creditor for more time.
- Sell an unused item on eBay.
- Check with Centrelink that you are receiving all of the social security benefit you are entitled to.