Warning: Payday loans, BNPL loans are in dire need of regulation

Emily Chantiri* advocates regulation of payday loans and buy-now, pay-later (BNPL) services, saying young people are slipping through the loopholes.

Getting a payday loan is easy, but that’s where the problem lies. Not enough is being done to discourage payday lenders from lending money to people who might have trouble paying it back.

The lack of background checks on loan seekers and the lack of regulation for payday lenders has resulted in many people falling further into debt after taking out one of these loans.

Why are borrowers struggling to repay?

Often it is young people or the most vulnerable who take up this type of credit – mainly because they cannot get credit cards or loans from mainstream banks.

Typically, licensed lenders do not charge interest on payday loans, but they can charge a lot of fees.

That means those who take out a loan end up giving back a lot more than they expect.

For example, most payday lenders charge a setup fee of 20 percent of the amount borrowed, plus a 4 percent monthly fee.

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

If that person then defaults, fees or charges can be as high as 200 percent of the total loan amount.

Loopholes are a problem

Many people look for a payday loan when they are in financial distress.

Consumer advocates fear loopholes in credit laws could open the door to predatory lending for millions of vulnerable Australians.

These advocates say payday lenders can use loopholes to circumvent the lending law, and urge that more regulation is needed to close those loopholes to protect consumers.

One such person is Fiona Guthrie, CEO of Financial Counseling Australia, who said financial advisors continued to see people who had taken out payday loans trapped in a debt cycle.

She explained that people often felt overwhelmed by financial stress, which meant it was difficult to know what to do and who to turn to.

“This stress naturally manifests itself in all aspects of a person’s life, affecting their relationship and often their physical and mental health,” Guthrie said.

“Children in families with financial burdens are of course also negatively affected.

“People may feel that there is no way out of debt, but there are always options.

“And the sooner you get advice, the better.

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

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

Global call for regulation of BNPL

Another credit pitfall that is often overlooked is Buy-Now, Pay-Later (BNPL) services.

In fact, consumer groups from nine countries have called for urgent action against BNPL lenders.

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

Australian consumer organizations, including CHOICE, are calling on the government to introduce legislation that will lower the cost of payday loans and make the product safer to operate.

“The government developed bills in 2017 that would do this, but did not follow them up.

“We need these laws to be put in place,” Guthrie said.

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

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

“The failure to act will create further difficulties for individuals and families who are already struggling,” he said.

One important regulation that urgently requires action on BNPL products is that they are regulated in the same way as other forms of credit.

This includes ensuring that measures such as fee caps, restrictions on unsolicited advertising and obligations to support people in financial distress that apply under national law are extended to BNPL.

Another important reform is to oblige BNPL providers to assess whether it is appropriate and affordable to lend to people without risking financial damage.

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

Before looking for a payday loan, there are other ways to manage bills and debt.

Call 1800 007 007 from anywhere in Australia to speak to a free, independent financial adviser.

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

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

The government’s MoneySmart website also has options that may be helpful.

*Emily Chantiri is a journalist based in Sydney and bestselling author of Savvy Girl Savings Book and The Money Club. She writes articles focusing on economics, money, finance, management, labor issues and property.

This article first appeared on au.finance.yahoo.com.

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