BORROWERS are losing beds, TVs and washing machines after taking out short-term, high-interest “payday loans” they cannot afford to repay, say consumer advocates.
The desperate use of household items as collateral for so-called “predatory” loans - which can charge rates of more than 40 per cent per annum - comes at time of increasing debt and unemployment levels, and as new figures show the number of personal bankruptcies in Australia rose to a near-record high of 7164 in the first quarter of the year.
Payday lenders say they provide an essential service to borrowers in need. Critics charge they are taking advantage of the vulnerable.
“I spend all day talking to people who are crying.”
Ms Lane said her workload had exploded in the past few months.
“The term ‘payday loan’ doesn’t quite cover it, because no one can ever pay it off in two weeks.”
She said that lenders should be banned from taking security over beds and other household items.
‘You don’t feel good when people beg you’
But John Brady, national compliance manager of City Finance, which lends money to people who need to fix cars or buy a new fridge, says there are so few repossessions like that, “you’d be able to count them on the fingers of one hand”.
His typical customer borrows $1500 and pays it off over a year, paying a 43 per cent interest rate and application fee of up to $380. Customers have to prove income, but can still get a loan if they are on Centrelink, he says.
“We regard people who are on Centrelink as having just as much right to finance as people that are not on Centrelink,” says Mr Brady.
“We don’t lend to people who can’t afford to repay the money without any difficulty, so where they get their money from is of little concern.
“If someone has Centrelink income, perhaps supported by part-time income elsewhere, we don’t regard them as being out of bounds.”
People are also looking for quick cash by hawking laptops, ipods, phones and jewellery.
Pawn shop owner Sharbel Ayaub says business is up 50 per cent in the past six months.
One in five customers are unemployed, including one woman who regularly returns to pawn off her jewellery in a bid to keep her struggling business afloat.
“A lot of people come in here because they’ve lost their jobs,” he says.
Laptops, phones, ipods and gold are pouring in, in exchange for quick cash. Customers have three months to buy back their goods –at a 20 per cent interest rate per month – or it goes up for sale.
“A lot of people are ashamed to come in here. And they tell you they’re struggling” says Mr Ayaub.
“You don’t want to take people’s stuff, but that’s your business. You get people begging you, and you don’t like that. You don’t feel good when people beg you.”
The bills quickly add up
Borrowers get in over their heads when they turn to quick cash loans to cover electricity bills or car registration fees, says NSW Consumer Credit Legal Centre’s Ms Lane.
“I get a steady stream of people who go to fringe lenders, as I call them, and are on Centrelink,” she says.
Ms Lane says the problem is going to get worse as more people lose their jobs.
“We’re starting to see people who are unemployed. It only takes a few months until after you lose your job and you just can’t pay anything. Unemployment definitely leads to immediate financial distress. It gets very serious very quickly,” she says.
This week the Federal Government unveiled proposed laws to crack down on lenders who provide borrowers with unsuitable loans.
Lenders will have to obtain a credit licence for the first time and those breaking these new laws face criminal penalties.
The banks immediately hit out at the proposed laws, warning they make lenders overly cautious in issuing credit.
CEO of payday lender Cash Doctors, Nick Auchincloss, says they will only lend to people with jobs.
“We don’t believe in lending to people who can’t pay back,” he says.
The typical customer is female, working in an office, earning $40,000 a year and needs a quick $400 to cover a short-term bill or unexpected expense. The interest rate is 26 per cent.
“They do very much use us as a budgeting tool, they have a good grip on their finances, but something happens like their car breaks down. We all live on the edge of our finances,” says Mr Auchincloss.
He understands why payday loans are seen as extortionate.
“There’s no doubt our fees are higher than an average loan,”he says.
“It’s like a DVD that’s $7 a night. That would be $32,000 for the year*; you wouldn’t do it. But again, it’s quick, convenient, for a short while and the cost is worth it.”
*Thanks to reader input, news.com.au contacted Mr Auchincloss, who says a $7 per night DVD rental would be $2555 per year.