Consumer groups are urging the Australian Securities and Investments Commission (ASIC) to end ‘harmful’ payday lenders and their high rates and fees.
The short-term lending industry has come under intense scrutiny in recent months, with many Australians reportedly hit by high fees and interest.
The Consumer Action Law Center publication specifically targeted short-term lender Cigno.
“For more than four years, fringe lender Cigno has signed short-term personal loan agreements using two-contract loan models that fall under exemptions to national credit laws, charging consumers far above the maximum. authorized in any form of regulated credit,” the statement said.
Politician Tom Abourizk said Consumer Action saw Australians ending up in worse financial shape than when they took out the short-term loan.
“The business model primarily targets people who are already in financial difficulty or at risk of it,” he said.
“Unless your circumstances change, the fast money and high fees that come with it mean you may end up worse off than when you started.
“We often see people using these loans to pay for everyday items just to manage to pay for groceries and things like that, because they feel like they don’t have other options.
“In many of these situations, if you have bills piling up, there are other options. There is financial hardship assistance that many companies are required to provide.”
How do short-term lenders work?
Short-term lenders are able to avoid the credit squeeze by reducing the term of the loan.
Being “short-term” means they avoid the credit law which states:
Under the short-term credit exemption, the National Credit Code and the National Credit Act do not apply to the credit if: (a) under the contract, the provision of the credit is limited to a period total which does not exceed 62 days.
This allows short-term lenders to exist in this space as long as the loan term does not exceed 62 days.
Short-term lenders like Cigno work under a two-contract system, where they actually facilitate the loan through another lender, which means customers can be charged twice.
Fiona Guthrie, CEO of Financial Counseling Australia, said these lenders charge high interest and late fees, which increases borrowers’ financial stress.
“Thousands of people are paying fees at exorbitant levels that should never have been allowed. For example, a loan of $60 can result in same-day fees of $420. debts, paying off these small loans many times over, leaving them much worse off,” she said.
The BNPL also under the microscope
Mr. Abourizk said the BNPL also uses the same exemptions that do not fall under the Credit Law.
According to a December report from Financial Counseling Australia and the State and Territory Financial Counseling Associations, 61% of financial counselors surveyed said that most or all of their BNPL indebted clients struggle to pay other living expenses.
Financial Counseling Australia’s report also detailed the lack of support for clients in financial difficulty.
“Access to BNPL is seamless early in the client journey, but many clients and their advocates face significant challenges when trying to negotiate hardship agreements,” the report said.
This came in response to Treasurer Josh Frydenberg’s announcement late last year that the government intended to reform Australia’s payments systems.
Both consumer groups said this was an opportunity to improve consumer protection.
Image by Christian Erfurt via Unsplash