Regulation of Payday Loans inAustralia

Payday loans often cop a bad rap from political and social justice commentators. As a short term loans, easy to access and relatively expensive form of finance, some critics see payday loans as a slippery slope to a vicious cycle of debt for those in society who are least equipped to escape it.

However, the reality is that payday loans play a crucial role in the Australian finance sector – a role that is recognised by governments and regulators on the basis that consumers who can’t get access to traditional forms of finance should have some equity in relation to accessing emergency funds.

In that context, payday loans in Australia are subject to the most stringent regulation anywhere in the world for this type of finance.

It is true, in large part, that people looking to access an expensive form of finance such as a payday loan, with low approval requirements and stringent payment terms, are likely to be from a lower socio-economic bracket and may at the edge of their capacity to service a loan. However, emergencies arise for everyone and access to this form of finance fills a vital role in the Australian economy.

Since banks and credit unions began winding back on short-term lending in the form of personal loans, the market for payday loans and similar types of finance has grown rapidly. For customers with a challenging credit history, who require a short-term injection of cash, payday loans are an effective and rapid solution to ease immediate financial pressure.

In 2012 the Federal Government introduced new consumer credit legislation to provide regulatory oversight of the payday loans sector. The legislation provisions include strict limits on the amounts and payback periods that apply to loans, caps on fees and charges, limits on penalties, rules around eligibility particularly for those already exposed to small-loan credit, protections for consumers on social security and requirements for loan providers to issue warning statements and advise of alternative forms of finance.

Since the introduction of the legislation, the regulator – the Australian Securities and Investment Commission (ASIC) has played an active role in reviewing and regulating the sector, as well as strengthening regulatory protections through means such as banning direct debit fees. Over the past five years alone, ASIC has taken strong action against poor lending practice by some providers who have failed to meet its responsible lending guidelines.

Actively responsible lenders, such as Spondooli, regularly review their own practices with a view to ensuring they meet or exceed the strict guidelines in place under Australian law. Recent amendments include:

• The requirement to provide 90 days’ worth of bank statements on application
• Limiting the number of loans within 90 days to two
• Not approving applications where the consumer has been a debtor under two or more small amount credit contracts in the past 90 days.

Responsible lenders recognise that short-term, high cost loans to deal with financial emergencies are not an ideal form of finance. However, these products play an essential role in Australia’s loans market. The best lenders will have developed a thorough set of principles and policies that ensure not just that they meet the requirements of Australian legislation but that they focus on the best interests of their customers.