The post-GFC economy has one sector that’s been quietly booming and that’s payday lenders.
The past 10 years has seen a 20-fold increase in demand for such lenders, who offer small loans to desperate people in exchange for large interest payments.
At the centre of this industry is financial stress and recent times have provided plenty of it.
Research from NAB has found 40% of Australians have experienced some form of financial stress or hardship in the past three months. According to the NAB Australian Wellbeing Survey for Q4 2019, this is the highest number of financially stressed Australians since Q4 2016, and an increase from 36% in Q3 2019.
No-one in a healthy financial situation ever takes out one of these loans.
A $300 payday loan with a four-month repayment period will cost a borrower $408 to repay in full. By comparison, an average credit card with an 18 per cent interest rate costs $305 to repay over the same period.
Lenders will typically time their repayment dates to coincide with an individual’s wage or income benefit payments, leaving people without adequate money to cover rent, food, or other basic living expenses. This, handily, increases the likelihood of the need for an additional loan.
This is starting to sound as if the loan sharks have become “legitimate” and set up shop online and in our neighbourhoods.
A 2012 study estimated that about 1.1 million Australians were, on average, taking out three to five loans per year. An estimated 40 per cent of payday loan customers took out more than 10 loans per year.
Cash Converters has long dominated the payday lending market after opening its first Australian store in 1984. “Cashies” has been the subject of several major ASIC investigations and last year was forced to refund consumers $10.8 million in fees.
The market is dynamic though, with dozens of new online payday lending services springing up and advertising aggressively to those who might have been too ashamed to rock up to a storefront in person.
It is also now common practice for payday lenders to sell the data of people who have been rejected for a loan to other, higher risk payday loan providers.
All in all, we are talking about an unpleasant world most Australians are happy they don’t have to think about.
One in five Australians does not have access to emergency cash.
But there is one dark truth about payday lenders that trumps all others: they provide a necessary service.
Twenty-one per cent of Australian households doesn’t have any way to access $500 in the case of an emergency.
This makes every car breakdown, sore tooth, broken appliance, or sick child a financial disaster.
Payday lenders offer a fast and easy way to access necessary cash, with few limits on who can access loans and no restrictions on what they can be used for. The application process is relatively anonymous and the repayment process is simple to understand.
So unpleasant though the world of payday lending is, the answer cannot be to simply crackdown on it.
If you’re in over your head, speak to one of our team to restructure your finances out of debt.