One consumer advocate group in Australia is urging greater public awareness in regards to the potential risks that come with payday loan lending. This comes as the country is in the middle of a debate relating to regulatory reforms of the bad credit loan lending industry.
Credit Savvy presents the case that a lot more needs to be accomplished in helping consumers understand that there can be a severe negative impact on the future financial health of Australians who borrow from such businesses.
Writing in a statement, Dirk Hofman, managing director of Credit Savvy, states that the major problem going on is that Australian consumers are too easily lured and tempted by the marketing gimmicks of easy money from payday lenders. At the same time, they fail to realize the long-term repercussions on their personal financial situation, credit worthiness and debt loads.
“Household debt is at record levels, and more than half of Australians were found to experience a cash shortfall between their paydays last year, so payday loans are dressed up in friendly packaging to look like a convenient solution,” he said. “However, our research suggests that Australian consumers really need to watch out for the high fees associated with these loans.”
In addition, Credit Savvy states that if a consumer borrows $1,000 from any online bad credit loan lender or credit card then they will owe $1,240 in just one month. This means consumers will pay back an additional $240 in fees and interest charges after just 30 days.
Hofman notes that this is much more expensive than overdraft charges, another headache inducing fee imposed by financial institutions. The consumer advocacy organization says when you use a $1,000 personal overdraft then you’ll pay as much as $12 in fees and interest charges once the 30 days are up. This is equal to a savings of up to $228 when compared to a payday loan.
The group also alludes to a credit card cash advance as a possible alternative. When consumers take out a $1,000 cash advance, consumers will pay about $28 after a month. Australian consumers can then save upwards of $218 when compared to a bad credit loan.
Since March, the Australian Securities and Investment Commission (ASIC) has been cracking down on the nation’s payday loans industry. It has been warning businesses to improve their lending practices. If they refrain from doing so then they could experience state enforcement if it’s found lenders are engaging in risky business practices.
The Australian markets regulator wrote in a statement that it has delved into some payday loan firms and it has discovered that an array of lenders are violating lending obligations and failing to maintain an extensive review process, documentation and record keeping.
“ASIC will use its powers to reduce the risk of payday lenders providing unsuitable loans and to reduce the risk that financially vulnerable consumers get caught in a debt spiral, where new loans are effectively used to pay back old loans,” ASIC Deputy Chairman Peter Kell said in a statement.
Moreover, the ASIC noted that it has come across several cases of compliance risks relating to tests for loan suitability. This is important because a customer’s multiple payday loans should be taken into account if they’re approved for a bad credit loan or not.
In Australia, a payday loan is usually $1,529 or less with a 16-day to one-year length and issued by a non-banking financial institution.