Whilst you’ve probably heard of the buy now pay later (BNPL) service, AfterPay – BeforePay is now a thing too! Notably, the two companies are not affiliated, however, both represent a new breed of financial technology (“fintech”) that fills a gap in the credit services market whilst playing the perpetual game of regulatory whack-a-mole.
Wage advance services are now flooding the market as an alternative to traditional payday loans, and unlike normal lenders, they aren’t legally required to conduct credit checks, abide by regulated dispute-handling processes, or offer hardship support to customers. Under the guise of helping people to get out of a sticky financial situation without asking questions (like a good old friend), these lenders allow you to “access the money you’ve already earned, instantly”, with iOS optimised apps that link up to your bank account “to help you budget” whilst screen scraping your bank account details and enabling you to apply for credit from within the app.
With such clever marketing – often aimed at millennials – it’s no wonder why young people are downloading these apps in droves! The most unfortunate fact of the matter is that these credit companies ultimately profit from lending money via these high interest loans, whilst the data shows that around 15% of payday borrowers end up in a debt spiral.
What Is a Payday Loan?
Payday loans are short-term personal loans of up to $2000 cash, that give the borrower 16 days to pay the full amount back. Whilst many lenders try to make the process of taking out a payday loan as fast and convenient as possible, some lenders may even request electronic access to the borrower's bank account (a practice known as screen scraping).
In spite of the fact that payday loans are notorious for having high and hidden fees, it nonetheless remains a popular option for borrowers who are desperate for funds and can’t get finance due to bad credit.
Payday Loan Interest Rate
Compared to other types of lending, payday loan interest rates are incredibly expensive! For example, home loans can start at 1.67%, car loans at 3.25% and personal loans at 4.15% - however, many payday loans have incredibly expensive establishment fees, sometimes adding between 10% and 30% of the amount borrowed up front, and then charging up to an extra ongoing fees!
Especially for a person who’s stuck in a tight spot financially, these fees can add up, so it’s super important to crunch the numbers to check what the true payday loan interest rate is!
When Desperate Times Call for Desperate Measures
Those who find themselves in need of fast cash often feel they have no choice but to agree to harsh payday loan repayment conditions with high interest loans.
The situation then compounds when these people are unable to repay, or after doing so, continue in the debt cycle by taking out a new loan, only to end up continually paying fees and interest on numerous debts that never get settled (thus the proverb “robbing Peter to pay Paul”).
Alarmingly, three is the average number of payday loans held by payday loan customers, with an average combined debt amount of $2900. And whilst newer “online” lenders might appear to offer comparatively lower rates than traditional payday lenders, those small fees tend to add up quickly over the lifetime of a personal debt cycle.
Cunning Marketing Tactics
Newer fintech lenders are intensely targeting the younger demographic with strong digital domination, “value-added” finance apps, emoji-loaded social media presences and tactics such as cash giveaways to generate leads and incentivise adoption.
In a world where young people’s attention is fixed on their mobile devices, these for-profit lenders’ strategies run rings around those of the less well-publicised (yet probably more appropriate) free options, such as financial counselling and low-to-no-interest loan providers.
Extra Credit Means Extra Debt
Online payday advance lenders often use the fact that they don’t conduct credit checks to attract many of their customers to sign up for high interest loans.
Whilst there may be a subset of consumers who would find this option simpler and easier than getting a traditional loan, no doubt many of those who opt for this solution know they wouldn’t pass a credit check, anyway.
Even though they don’t conduct credit checks, many such lenders implement their own set of criteria, sometimes utilizing their proprietary mobile app to “scrape” financial information from applicants’ bank accounts! Proponents of the method argue that it reduces the incidence of fraud, however, screen-scraped data can be easily mistaken, and the practice can cause consumers to unintentionally breach their bank’s terms and conditions, possibly leaving them liable for losses incurred from the theft or misuse of their financial information.
It also raises further questions about how consumers’ data is being used (for example, being shared or on-sold to third parties). Many consumers have had the experience of providing their personal data to a company, only to receive unsolicited offers from other companies later on.
Without regulation, this poses a huge problem for financially vulnerable consumers, if every month they receive unsolicited credit offers from other payday lenders.
In addition to not having to conduct credit checks, BNPL and wage advance services are also not bound by affiliation with AFCA (the Australian Financial Complaints Authority), whose role as ombudsman is to provide an impartial, independent, and binding review of any disputes that may arise between the consumer and a financial service provider.
There is also no current legal obligation for these lenders to provide hardship assistance to those who may be struggling to repay. The big concern is that without these consumer protections in place, BNPL and wage advance services will ultimately add to consumers’ existing debts whilst simultaneously reducing disposable incomes.
If people are already unable to repay their existing debts, the amount of fees and interest these unlucky debtors must pay, will only get worse.
Critics of the current regulations often cite legal loopholes as a breeding ground for opportunistic practices in the lending landscape. The argument is that BNPL and wage advance services are analogous to payday loans and personal loans, and should be regulated in the same manner.
Whilst many industry players strongly back the motion, further regulation ceases to acknowledge the fundamental issue of demand. Current levels of unemployment exacerbated by COVID, coupled with the reduction of government support payments and current proposals to further de-regulate the industry to stimulate credit growth within the greater economy, creates a favourable environment for quick credit providers to proliferate.
Thus, when demand-driven innovation in the financial sector moves faster than regulation can be implemented, it results in a perpetual cycle of “regulatory whack-a-mole”.
What Can You Do to Protect Yourself?
The biggest issue with payday loans is the exorbitant amount of fees and interest charged. In desperation, many people only see the short-term relief which payday loans offer.
Most of the time people don’t read the fine print, which details the interest, fees, and charges – and even then, it is sometimes unclear how those expenses are actually calculated. So, if you are desperate for cash, plug the loan details into an interest calculator before you sign up to make sure you can actually keep up with the interest repayments.
The vicious cycle of not being able to pay bills and resorting to payday loans will only continue if one falls into the pattern of borrowing to repay other debts. The bottom line if you are stuck in a debt spiral, is that unless you increase your income or reduce your spending to pay down the principal debt amount and maintain your payday loan repayment, the debt and interest is only going to compound and get worse.
Payday Loans Australia - Are There Alternatives?
There are always alternatives - so make sure to finish your research before clicking “accept” on any offer for credit. As an alternative to incurring high-interest debt, if you are a health care/pension card holder earning less than $45K after tax ($60K for couples), have lived at your current or previous address for at least 3 months, and can show that you have the capacity to repay the loan, you may be eligible for up to $3000 from a government-backed NILS Loan (No Interest Loan Scheme).
For more information about NILS loans, call 13 64 57. However, if you are currently stuck in the debt cycle, and there is no foreseeable way that you are going to repay your debts without increasing your income or reducing your expenses – you likely need help from a professional debt assistance service, such as Credit Counsellors, who can help you assess your options and find a solution.
Most people aren’t aware that there are legitimate and legal options available that can give you relief from having to pay back the full amount of some debts. Contact us today on 1300 003 328 for a confidential assessment and let us help you get your finances back on track!