Financial experts warn of dangerous payday loan trap
Daniel Bailey admits he was desperate when he took out his first payday loan.
He hoped the product would help him get out of financial difficulties, but the rapid repayments of the high interest on the loan set off a “vicious cycle” that degenerated into unmanageable debt.
When Mr. Bailey lost his job over Christmas, the massive weekly repayments put him in $ 20,000 in debt and deprived him of a good credit rating to qualify for a car or home loan.
Mr Bailey told news.com.au that he was losing up to $ 600 each week because of his debts and that at one point he had signed up to five payday loan providers in a desperate attempt to keep his finances in order.
He said he has taken out payday loans with Nimble, Cash Converters, Speedy Finance and Virgo Finance, claiming that all of the fast lenders are targeting his financial vulnerability to keep him coming back for more.
“You get to a point where you’re near the end, then you get an email with an offer saying they can refinance you, so maybe it’s $ 1,000 or $ 800 coming up. “said Mr. Bailey.
“And you need it, you take it. It’s a week’s break from all the garbage.
“It becomes like a vicious cycle. “
The loans put him in a cycle of debt that ruined his credit rating, Bailey said.
“No one is going to hit you with a 40-foot pole, and the only ones that will hit you are the ones you stuffed with in the first place,” he says.
“You have no hope… bankruptcy is my only option. “
News.com.au reviewed payday loans as part of its new series scammer, providing readers with practical cost-of-living tips and tips on how to get a better deal, all with the goal of helping you get financially fit.
Gerard Brody, managing director of the Consumer Action Law Center (CALC), said payday loans target people who have found themselves in financial difficulty by making it easier to register.
He said a payday loan should be the very last option for consumers struggling with cash flow, as quick lenders have taken on financially struggling Australians by offering interest repayments of up to $ 400. %.
Overdue bills, an unexpected car breakdown, or a broken washing machine can lead people to take out a quick loan, which is advertised online as easy and quick with limited hurdles.
“So when people do it hard, often the first thing to think about is how to get the money, and they’re less likely to think about the longer term consequences,” he said. .
“It’s a natural human instinct – we focus more on the immediate than the long term. Payday lenders are really exploiting this.
WHAT TO LOOK FOR
Quick loans are usually very expensive and are meant to be repaid within two to three months. Repayments are typically withdrawn every two weeks and represent a huge chunk of a borrower’s income, says Brody.
According to CALC figures, interest payments on a $ 1,200 loan with a credit card or bank will cost the borrower around $ 92 and $ 62 respectively over nine months.
But the repayments on a quick loan that borrowed the same amount are dramatically increased to almost $ 700 over the same period.
“When that money is taken, they don’t have enough money for the next fortnight and may be drawn into another loan,” he told news.com.au.
The consumer advocate said Mr Bailey’s spiral of indebtedness with this form of lending was not uncommon as borrowers typically became loyal customers.
“So even if it was an initial need perhaps related to a car repair or the purchase of household appliances or a trip with friends, the addiction becomes the day-to-day management like paying the bills. bills, pay for food, pay rent, ”Mr. Brody said.
“And if you borrow for these purposes, you will quickly fall into further financial difficulty.”
Browsing the websites of the lenders Mr. Bailey has fallen victim to, none use explicit language to identify the payday loans or the extreme interest payments that come with the product.
But what is clear is the ease and speed with which the borrower can take out a loan.
Nimble appears to have the most accessible loan application and assures potential borrowers that they will have the money in their bank account within an hour of loan approval.
Speedy Finance is just that. His site says the application takes less than five minutes and the borrower can receive the funds in less than 24 hours.
The lender uses language other than payday loans, describing the product as emergency loans, travel loans, medical loans, and personal finance loans.
Virgo Finance says its service offers consumers “fast and easy approvals, so you can buy with confidence sooner.”
The personal loan company describes its products as auto loans, equipment loans, motorcycle loans, personal loans, debt consolidation loans, and even boat, jet ski and trailer loans.
Cash Converters offers “instant in-store cash after approval”.
The company’s website admits that payday loans, like his, can be ambiguous, so he’s “there to help clients make the right loan choice.”
“There are many different and sometimes confusing loan names used by different lenders, so we would like to help clear up the confusion,” the site promises.
He says his cash advance loan is a “small cash loan that is usually paid off in just a few weeks.”
Mr Brody warns that payday lenders are now ideally suited to targeting young Australians, with ‘lifestyle borrowers’ in the industry growing at a rapid rate.
This group is generally employed but is attracted to a quick loan to supplement the little extras in life.
The CALC recently partnered with the Financial Rights Legal Center to focus on the growth of unsafe lending, especially among men between the ages of 18 and 35.
“I think this is in part due to the ease and availability of (payday loans) online,” Mr. Brody said.
The joint campaign singled out young men from ‘predominantly’ blue-collar ‘professions as the group most at risk of getting quick loans due to the pressure to maintain their lifestyle and the pressure to consume coupled with a “Why wait, I want it now ‘mentality.”
WHAT TO DO IF YOU ARE IN FINANCIAL DIFFICULTY
Getting a high interest loan from an aggressive payday lender isn’t the only option for Australians who are rocked by unexpected debt.
There are more empathetic services.
The government funded organization Good Shepherd microfinance provides financially vulnerable people with access to safe and affordable products, including interest-free or low-interest loans.
Mr Brody said the need for a payday loan to cover an immediate expense would not solve the financial problem and would only make the problem worse.
“They are more likely to benefit from talking to a financial advisor,” he said.
“There’s the Financial Debt Hotline, which is a free phone service where people can speak to an independent, confidential financial advisor to get options on how to manage their debt. “
This service can offer you assistance related to your rights and how to request help to manage refunds in a sustainable manner.
The coalition government has pledged $ 126 million over the next four years for capacity and financial advisory services.
“These services are free, voluntary and confidential,” a spokesperson for the Department of Social Services told news.com.au.
“They provide support to disadvantaged Australians who need immediate help in difficult times and enable them to learn financial management skills for the longer term.
“Assistance is provided in person or over the phone and includes assessing a person’s financial situation, identifying options and making decisions to resolve financial difficulties, advocacy and negotiation with third parties such than banks, and referral of customers to other support services. “
Financial planner, author and Sugarmamma Tv personality Canna campbell told news.com.au that taking out a payday loan should be the “absolute worst case scenario.”
She says the best way to avoid these dangerous products is to budget so you don’t live beyond your means.
“Budgeting is essential,” she said. “You have to understand what your cost of living is so that when a luxury purchase comes your way, you know whether you can afford it or not.
“The next thing is to always have emergency savings in a separate savings account.
“So if something happens, like the washing machine breaks down or the car needs to be fixed by a mechanic, you have emergency money that you can use to help pay off without having to borrow money. money for desperate things to help you. “
If you are struggling financially, the National Debt Helpline at 1800 007 007 offers free and confidential advice from professional financial advisers. The hotline is open from 9:30 a.m. to 4:30 p.m., Monday to Friday.