Jessica Wright | SMH | August 28, 2011
Loan sharks who exploit vulnerable customers with short-term cash advances at exorbitant interest rates will be blocked by new laws.
The federal government wants to break the business model of the rapidly growing pay-day loan industry, which has largely avoided the regulation levelled at the Australian banking sector.
The Assistant Treasurer, Bill Shorten, has introduced new draft legislation that would cap interest rates and costs associated with pay-day loans.
”There are far too many gut-wrenching real-life examples of good, ordinary people who find themselves in a tough spot but are massively exploited by pay-day lenders,” Mr Shorten said.
He said there were documented cases where interest rates of up to 600 per cent were charged on small cash loans with hidden fees and charges far above reasonable expectations, including up to $50 to send a letter to a customer.
Mr Shorten intends to override state and territory regulations by introducing the changes.
Contracts with customers of less than $2000 would have a maximum upfront fee of 10 per cent and an interest rate of 2 per cent a month. This meant that each $100 borrowed for one month under the proposed cap would attract no more than $12 in fees and charges, a cost that was ”reasonable, and still enables the industry to provide the product.”
While he understood there were often legitimate uses for pay-day loans, Mr Shorten said he had no time for operators who deliberately targeted vulnerable and financially desperate people.
”We are focused on protecting vulnerable consumers, not targeting the pay-day lending industry,” he said. ”But let’s be clear, I do have a problem with pay-day lenders who think it is OK to prey on the weak and exploit people with outrageously exorbitant interest charges. That sort of business model needs to be broken because it’s simply not fair.”
The $800 million quick-cash industry – which is largely backed and owned by international money lenders – mostly operates on three main selling points.
Applications are processed rapidly and accessible online only; funds are guaranteed the same day and generally within one hour; and the criteria for borrowing is far more relaxed than regular financial institutions.
The draft laws also include a ban on refinancing or rolling over loans which often trap customers in a debt spiral.
The chief executive of the Consumer Action Law Centre, Carolyn Bond, said the biggest concern for consumers regarding pay-day loans was that borrowing money on a short-term basis with high interest rates created a cycle of debt they were unlikely to be able to escape.
”Given that many of these consumers are living from day to day with their expenses, it is likely they are already in financial difficulty and there is a great risk that their financial problems will only get worse as the interest charges are very hard to keep on top of.”
The federal opposition has previously expressed its support for cracking down on unfair pay-day lenders and the states and territories have deferred to the federal government to create new national watchdog powers.