Attractive advertising, paired with an individual desperation, is what helps to fuel the seduction of Payday (short-term) loans, and they are quickly becoming a menace to our society; more often than not leading people into a worse financial situation than where they began.
Payday loans in Australia are part of the small loans market. Statistics show that many people who apply for such a loan are already in financial hardship. They may have even already tried to apply for a small personal loan through a banking institution and been denied a loan. The national consumer credit protection act mandates that all lenders ensure that the person applying for a loan can afford to repay the loan without substantial financial hardship. Payday companies are not required to make such assurances for their clients and have made access to small loans of under $2000 increasingly easier with their online presence.
Unfortunately, many people don’t recognize the trappings and find themselves in greater financial hardship than ever before. Many Australians are now living paycheck to paycheck, leaving little or no money remaining every month for emergencies. A person who relies on their car for work may find that they require a $500 repair. With no access to the cash, they will turn to the payday lenders to take out a loan for that amount. Immediately, this loan will incur a 20% interest rate plus 4% interest for every month the repayment is not paid in full. Let’s remember, that people taking out such a loan couldn’t afford the $500 in the first place, so when the payment is taken out of their next paycheck, they are now in deficit of $600 (due to the interest) leaving them in a hole to finance everyday expenses including bills and food. It is here where the heartache of the trappings begin as the person will be tempted to borrow another $600 to ensure the electricity remains on; and so, the cycle of dependency upon these loan sharks begin.
Fortunately, the Australian government have ensured, through regulations, that there is a cap of 23% interest charged on these short-term loans. However, it is the other charges and the sheer fact that the person often finds themselves in further hardship, that makes these lenders the drug pushers of the financial services; predators to the most vulnerable people in our communities, getting them hooked on a debt cycle that often becomes impossible to get out of.