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Warning: Payday loans, BNPL credit need urgent regulation

·4-min read
An upset woman reading a letter from a payday lender in her home front yard.
People who access payday loans and BNPL services can end up having to pay back a lot more than they expected. (Source: Getty)

Getting a payday loan is simple, but that’s where the problem lies.

Not enough is being done to stop payday lenders from giving money to people who might struggle to pay it back.

The lack of background checks on loan seekers and lack of regulation for payday lenders has meant many people have ended up falling further into debt after taking out one of these loans.

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Why are borrowers struggling to repay?

Often it’s young people or the most vulnerable who use these types of loans - largely due to the fact they’re unable to get credit cards or loans from mainstream banks.

As a rule, licensed lenders don’t charge interest on payday loans, but they can charge a lot in fees.

This means those who take out a loan can end up having to give back a lot more than they expect.

For example, most payday lenders charge an establishment fee of 20 per cent of the amount borrowed and a 4 per cent monthly fee on top.

Which means that for a $2,000 loan, a borrower would end up paying a $400 establishment fee plus an $80 monthly fee.

Then, if that person was to default, fees or charges can go up to 200 per cent of the total loan amount.

Loopholes are a concern

Many people seek payday loans when they're in financial distress.

Consumer advocates are worried that loopholes in the laws governing loans could open the floodgates to predatory lending for millions of vulnerable Australians.

These advocates say payday lenders can dodge the Credit Act through loopholes, and urge that more regulation is required to tighten these loopholes in order to protect consumers.

One such person is Fiona Guthrie, ceo of Financial Counselling Australia, who said financial counsellors continued to see people who had taken out payday loans ended up trapped in a cycle of debt.

She explained that people often felt overwhelmed by financial stress, meaning it was hard to know what to do and where to turn.

Read more about Payday and BNPL loans:

“That stress of course manifests across all aspects of a person's life, affecting their relationship and often their physical and mental health,” Guthrie said.

“Children in families where there is financial stress are obviously also affected negatively.

“People can feel like there is no way out of debt, but there are always options. And the earlier you seek advice the better.

“Pick up the phone and ring a financial counsellor on the National Debt Helpline on 1800 007 007.”

And remember, financial counselling is a free and confidential service.

Global call to regulate BNPL

Another credit trap often overlooked is buy-now, pay-later (BNPL) services.

In fact, consumer groups from nine countries have called for urgent action on BNPL credit providers.

The global call-out around BNPL coincided with World Consumer Rights Day, which fell on March 15, 2022.

Australian consumer organisations, including CHOICE, are asking the Government to introduce legislation that will reduce the cost of payday loans and make the product work more safely.

“The government developed draft laws in 2017 that would do this, but has not proceeded with them. We need those laws to be introduced,” Guthrie said.

And CHOICE has joined consumer groups from the nine countries calling for urgent action on BNPL providers, with new data showing many Australians are struggling with this form of debt.

A logo for the companies Afterpay and Zip is seen in a shop window.
CHOICE is calling for BNPL providers to be obligated to assess whether it's suitable to provide credit to people. (Source: Reuters)

CHOICE CEO Alan Kirkland said companies had been allowed to sell unregulated loans to Australians for long enough.

“Failure to act will create further hardship for individuals and families who are already doing it tough,” he said.

One key regulation requiring urgent action for BNPL products is that it be regulated in the same way as other forms of credit.

This includes ensuring that measures such as caps on fees and charges, restrictions on unsolicited marketing and obligations to help people in financial hardship that apply under national laws are extended to BNPL.

Another key reform is to obligate BNPL providers to assess whether it is suitable and affordable to provide credit to people without risk of causing financial harm.

Are you affected? Here’s what you need to do

Before seeking a payday loan, there are other options for managing bills and debts.

Phone 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor.

You can also talk to your electricity, gas, phone or water provider to see if you can work out a payment plan.

If you are on government benefits, ask if you can receive an advance from Centrelink.

The Government’s MoneySmart website also offers options that may help.

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