Payday Loans – A Debt Trap ?

Payday lending is said to specifically target vulnerable Australians who are in financial distress

A recent survey commissioned by Stop the Debt Trap Alliance, a coalition of 20 consumer advocacy groups, revealed that more and more Australians are falling into a debt trap from payday loans. The group is urging the federal government to pass the Small Amount Credit Contract (SACC) into law.

Said legislation is anticipated to provide stricter regulations on the lenders and capping the amount of interest and establishment fees on this type of credit.

Payday lending is said to specifically target vulnerable Australians who are in financial distress and thus needed more protection against predatory lenders. The government however was not able to pass the law in due time for the reason that the subject is actually more complicated than it appears on the surface, payday loans is not like a harmful substance that the government can just easily restrict. There are certain benefits that this type of credit provides especially for individuals that are financially excluded.

The research released by the coalition is geared towards their advocacy to persuade the government to see the harms of payday lending. However, the bigger problem may not simply be the marketing strategies being used by these lending businesses, the fact that more Australians are getting into debt traps actually mirrors the state of decreasing financial literacy.

The payday loans are mere instruments on how individuals fall into a debt spiral. Like all important decisions, consumers beforehand must understand the consequences of the contracts or transactions they are getting into, including loans and all of the conditions that comes with it like interest rates, due dates and fees. Consumers falling into the debt trap have had a very little understanding of finances, how credit works and the potential impact on of how these decisions would affect their financial well being.

What’s the solution?

Relying on the government to protect irresponsible financial decisions is not the solution. Otherwise, the State would be interfering on private contracts among businesses and individuals undermining freedom of individuals and businesses to enter into agreements. Each of the parties to the loan has to be responsible in studying the implications of entering into the agreement and following the obligations that goes into every word of it. The laws cannot just go to the rescue of the individuals who have been reckless in their decisions. That is unfair.

Dealing with the matter is precarious, at best, legislators must have to balance the interests of both sides: lenders and debtors. The State can also do better on the ways it seeks to educate the population on financial literacy and debt management rather than implementing stricter regulations that does not really address consumer behavior.

There are already safeguards in place to protect the vulnerable persons; current consumer credit protection laws require payday lenders to assess whether a consumer is suitable for their product. The problem however is the process becomes subjective to the individuals who are determining creditworthiness. The drive to earn more profits at the expense of getting more people into debt sometimes outweighs fair judgment.

Financial Literacy & Debt Management can help you get the most out of payday loans and get on top of your finances

Society dictates that one must sympathise with the vulnerable persons who succumb to payday lending, but the lenders may not be the one to blame. Objectively, payday loans cater to events where urgent money is needed for emergencies when other sources of credit are not available quickly enough or the process is time-consuming. Another point that the government might consider in finding a solution to the problem is to expand the reach of banking services to include those who are financially excluded.

The difficult and complicated process of obtaining loans from main banks pushes people to resort to simple, quick and easy payday loans online. This situation resulted to the proliferation of payday lenders in locations where main banking services are not easily available and the rising popularity of online payday loans. Applying for payday loan online skips the traditional notion of having to go to the bank and bringing along several paper works. These reasons alone make payday loans very attractive.

The apparent ease and convenience of securing credit may justify the charging of higher than normal interest rates. Basically, it’s a trade-off. Demonising the whole payday loan sector is uncalled for. As they actually provide credit to those who are financially excluded from the banking system or those who simply cannot meet the requirements of mainstream credit. What is harmful is not the payday loan itself but the predatory scheme of charging usurious interest rates.

The research revealed that payday lenders target individuals in lower socio-economic backgrounds, including women who single handedly has to raise her child. That image alone would in itself fuel rage against lenders victimising on the unknowing and innocent persons. But that is actually expected, payday loans by nature are supposed to fill the gap where the formal credit and banking system does not include. However, the problem lies not on the ideal purpose of using payday loans for emergency.

It is on how individuals on this socio-economic stratum have actually come to use it, compounded by their lower financial literacy and failure to check whether the method is actually sustainable that ultimately spells trouble. Payday loans are now commonly obtained to meet the weekly recurrent costs of living such as rent, utilities and food. People who rely on payday loans and use them repeatedly cause themselves financial distress. It does not actually solve the root of their problems which could have been addressed by financial planning and budgeting.