Interest-free loans short-circuit poverty cycle

SMALL amount cash loans - filling a gap for people suffering financial exclusion, or quick cash outlets preying on the desperate and disadvantaged?

The Small Amount Credit Contract (SACC) sector - otherwise known as cash loans or payday lending - is currently "on notice" by the Australian Security and investments Commission (ASIC) to improve its practices following reports of irresponsible lending.

The controversial sector offers small loans of up to $2000 and has been in the spotlight with concerns the sector is targeting society's most vulnerable.

A recent ASIC report found there was misconduct with 13 lenders around loan suitability, credit law compliance, record keeping, fees and charges, loan terms and misleading advertising.

Warilla North non-for-profit group BaptistCare said through their No Interest Loans Scheme (NILS) microfinance program they were seeing an increase in people "spiralling" into unprecedented payday lending debt.

"No one sees the destruction these payday lenders are causing families behind closed doors," Warilla BaptistCare senior NILS co-ordinator Lynne Payne said.

"A lot of these payday loans that we see are for $100 or $150, they're not huge. But they're paying back $250. On a $100 loan, with all fees and charges, it's effectively 113 per cent (interest), and anything over and it's about 300 per cent. And some clients have three or four of these loans.

"It's a financial merry-go-round. Once they're on it they can't get off it. You're caught. You borrow once and spend it twice and that's how it works.

"People also don't or can't read the contracts. Time and time again I say to people, 'do you know they have charged you $7 whether you answered the phone or not, $25 for a letter, $35 for monthly administration and that's on top of the interest rate?'

"If they go into default, then they're hit with a further $50 and if there's no money in their account for a direct debit they're charged for insufficient funds.

"It's like quicksand; payday lenders and pawnshops. It could be their guitar, grandmother's jewellery, a drum set, if they don't keep paying the interest, the goods are sold. So where do they go? Back to payday lenders. Then they end up with a cash debt and no goods. It's a cycle."

BaptistCare Illawarra cluster manager Walter Forrester said it was no coincidence there was a high concentration of SACC lending businesses in pockets of high disadvantage.

"If you look at statistics for Shellharbour and those specific disadvantaged areas, Warilla is a pocket of it, and Warrawong (in Wollongong LGA) and that's where you find many of the SACC lenders.

"Through 500 sites across Australia, NILS programs provide interest-free loans, but still reach less than four per cent of the microfinance market of those who are financially excluded from mainstream lending. So this is a huge industry."

The SACC sector, involving brands such as Cash Converters, nimble.com and walletwizard.com, are regulated under the National Credit Act.

Changes to the act were introduced from March 2013 which prohibit short-term loans requiring repayment within 15 days or less, required credit providers to display a warning and placed a cap on fees.

The act also says credit providers "must not enter into a contract with you that is unsuitable".

Chief executive of the peak body for the SACC lending sector - National Credit Providers Association (NCPA) - Philip Johns said SACC providers operate under the same regulations and assessment processes as a bank and the industry was heavily regulated.

"To provide a SACC, providers must comply with a 4000-page document of acts, regulations and ASIC regulatory guidelines," he said.

"On top of that, to exist as a non-bank credit provider there is 6000 pages of corporate legislation.

"The average cost for a credit license is anywhere from $70,000-$200,000 up to millions of dollars.

"The penalty of knowingly doing the wrong thing is jail time and loss of license. No SACC director is going to risk hundreds of thousands of dollars just to overcharge someone $50 or $60."

Mr Johns said protection laws for SACC consumers were of a "staggering" proportion, with various mechanisms, such as a Debt Spiral Cap and 20 per cent net income cap for people on Centrelink, in place to safeguard customers. However he said it was common for customers to withhold information from SACC lenders to get a loan.

"If you're a business person and someone presents as a real person and they have bills and other contracts, there is no reason to assume that they can't enter into a credit contract.

"Because these are non-bank lenders they are lending their own money. Unlike a bank teller, you wouldn't give your own money to anyone unless you know they have the capacity to repay it."

Mr Johns said it came down to supply and demand.

"The industry isn't creating the demand," he said.

"These demands are not being met by bank products but they're being met by these licensed credit providers. We have the same regulations and assessment processes as a bank.

"For the low income consumer it's far easier to manage repayments on a $100 or $200 loan than . . . a $1200 loan."

Have you fallen foul of these kinds of lenders? Drop us a line at ltnews@fiarfaxmedia.com.au