Dr Karen Alpert of UQ Business School says education is the only way to disrupt the debt-inducing cycle of payday loans that trap one million Australians per year.
“The biggest defence against payday loans is education. The smart money website and the ASIC website has a whole page outlining the dangers of falling into a payday loan cycle,” Dr Alpert said.
A payday loan is a small credit contract equalling $2000 or less. A $100 loan for less than one month will cost $24 along with a deadline to repay the loan.
“Once you start calculating the effective rate that you’re paying, it totals 320 per cent,” Dr Alpert said.
The simplicity of qualifying for a payday loan enables a cycle of dependence on the loans. A report for the Consumer Law Centre Victoria found that 65 per cent of payday loan holders had taken out a repeat loan with an average of one loan every two months for a year.
“Companies are meant to re-evaluate the customer’s suitability after the third loan,” Dr Alpert said.
“Most of them do a quick cursory look and say ‘yeah, it looks like they can pay.”
Payday loans are targeted to a particular market. Research conducted in 2012 by several universities from around Australia found that 80 per cent of the payday loan recipients in the study received Centrelink payments. Thirty seven per cent were disability support pensioners.
“Payday loans target people who are on Centrelink payments, people living pay check to pay check, people who have had a financial catastrophe, relationship breakups, and disabilities.
“You’d have to be pretty desperate to take on a loan that has got 20 per cent upfront costs to set it up and four per cent a month.”
Sixty per cent of the participants had a poor credit rating. Most participants would spend their loan on regular expenses such as food, bills, and rent.
“The payday loan companies justify what they’re doing by saying ‘no one else is providing loans to these people,’” Dr Alpert said.
“They would justify the high rate by saying high risk, high default rate. However, you would think that 300 per cent is a little high.”
The practice of payday lending is regulated by the government. The establishment fee of the loan is capped at 20 per cent, the monthly fee is capped at four per cent, and the loan companies must provide warning about alternatives to payday loans.
Dr Alpert says that warning about payday loans is not a suitable measure given the lack of education of the demographic who take out payday loans.
“The regulations are trying to make the lenders aware that there are alternatives to borrowing like Good Sheppard, St Vincent and other State Government programs,” Dr Alpert said.
“For example, if it is an electricity bill that the person can’t pay, usually the company will figure something out to help pay it off.
“You can also apply to get an advance on your Centrelink. “The problem is a lot of people are too scared to ask.”
Dr Alpert says that information needs to be communicated more clearly to the customers, and they should play their part in educating customers.
“It’s a question of targeting these people through education, which is what ASIC is trying to do,” Dr Alpert said.
Several organisations have information on the truth about payday loans.
“The Good Sheppard is a church-run organisation that provides loans without piled-on interest,” Dr Alpert said.
“People can also turn to ASIC, State Governments and the Federal Government.”