Payday Loans in Australia - Government Regulations to Protect You
Payday loans in Australia help some people to urgently needed money before the next pay packet. Non-bank lenders, known as payday lenders, make short-term loans to people willing to pay a higher interest rate and/or fees associated with the loan. Previously there have been misconceptions about the trustworthiness of Payday Lenders however according to Australia's National Consumer Protection Act 2009, consumers have fewer concerns today about suffering from the few bad seeds; those unethical, predatory short-term or small amount credit contract lenders with the implementation of Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (the Enhancements Bill).
Government regulations to protect consumers
In a press release issued by Bill Shorten, Minister for Financial Services and Superannuation, it is shown how recent legislation specifically protects consumers in need of payday loans. Individuals and families in need of short-term funds are occasionally willing to pay higher interest rates (compared to bank loans and long-term loans) to obtain emergency cash funds. Recent government regulations protect consumers from extraordinary rates and fees that can establish a personal debt crisis.
Centrelink, NILS and LILS
Mr. Shorten says that consumers in need of paying utility bills should inquire about a Centrelink advance or the utility company's repayment policies concerning hardship. Similarly, a Centrelink advance can help individuals and families in need to buy food, vehicle repairs (or pay registration costs), and other essential items. A Centrelink New Start allowance can also help unemployed persons to pay for essentials. Not-for-profit sector LILS (Low Interest Loan Schemes) can also help for vehicle repairs and related costs. NILS (No Interest Loan Schemes) and LILS should be approached for help paying other essential bills. Although authors Geraint Howells and Christian Twigg-Flesner ("The Yearbook of of Consumer Law," 2012) write that NILS and LILS funds' access is limited in some parts of Australia, growing government recognition of the need to help low income Australians with these programmes is evidenced.
According to "Understanding Australian Consumer Credit Law," (CCH Australia Ltd., 2011) recent government legislation that caps interest rates and fees on short-term contract loans is long over-due. Legislators acknowledge that short-term payday-type lenders should receive higher than bank rates for assuming capital risks associated with these loans. However. "further regulatory interventions to protect against escalating debt might be a Code of Practice for Short Term Loans...restricting late payment fees and charges.
Legislation prohibits excessive fees on short-term contract payday loans
For example, an individual borrows $300 for a 16-day period. He agrees to repay the lender the $300 plus the standard fee of 24 percent, or a total of $372, to settle the payday loan in 16 days. A person in need of short-term cash may find repayment of the funds requires skipping required payments, such as utilities or rent. By not paying for the essentials of life, the borrower may look for another payday or short-term contract loan, decreasing his ability to pay other essential bills later.
Government regulations also addresses the risks assumed by consumers when refinancing short-term contract payday loans. Recent legislation prohibits this payday lender practice. The consumer's almost certain need to extend loans, or make a new loan, increases the high risk of experiencing a "debt spiral." The amount owed continues to accrue interest charges, making repayment more difficult for the borrower. Short-term lenders must henceforth supply information to consumers about other financial resources to meet their needs for cash, such as MoneySmart.gov.au.
In some cases, an individual can access financial resources other than a payday loan. Community organisations offering no or low-interest loan schemes should be considered by borrowers as a way to refinance higher interest, short-term loans. Utility companies and other consumer lenders may avail the borrower with hardship resources. Banks and financial institutions from whom the borrower has existing loans may agree to work with the borrower on a short-term basis or, in some cases, renegotiate interest rates on some loans carried by financially vulnerable Australians. Good communication between the borrower and his lenders is important when resolving the total debt picture, Mr. Shorten says.
National cap on short-term small amount contract loans
According to government legislation, small amount credit contracts – amounts up to $2000 with terms of 12 months or less - must not charge an upfront finance charge of greater than 20 per cent of the total borrowed amount. Lenders may not charge more than four per cent interest per month over the life of the loan.
"The Yearbook of Consumer Law," 2012 (Geraint Howells, Christian Twigg-Flesner)