Call for action on payday lending September 14, 2010 AAP
Consumer advocates are calling on the federal government to cap interest rates on short-term lending to prevent the nation's poorest people from becoming stuck in an inescapable cycle of debt.
A report released by the Consumer Action Law Centre on Tuesday says short-term lending - or `payday lending' - has grown almost tenfold in the past eight years.
The report says hundreds of thousands of Australians use short-term loans to borrow hundreds of millions of dollars every year, with Cash Converters alone lending out $124.5 million in the past financial year. Advertisement: Story continues below
Short-term lending is typically a cash advance of several hundred dollars loaned to consumers over short periods at high interest rates.
A loan of $300 could incur an interest charge of $35 for every $100 loaned, repaid over four weeks in two fortnightly instalments.
The lender takes the repayments directly from the consumer's bank account on payday, often leaving the borrower with little money until the next payday.
Many consumers then borrow more money to cover the shortfall, which is the beginning of a vicious cycle.
The report, Payday loans: Helping hand or quicksand?, says that when the interest rate of the short-term loan is calculated into a comparable annual percentage rate (APR), the interest rate is usually 400 per cent or more.
"These loans cost a staggering amount by any standard," says the report's author and Consumer Action Law Centre senior policy officer, Zac Gillam.
"And unlike the picture painted by industry advertising, it appears most consumers are using payday loans to fill an income shortfall, with the vast majority of payday loans being spent on the basics of day to day living such as food, rent and bills and basic vehicle maintenance."
Mr Gillam said the practice exploded in the United States in the 1990s and there were now more payday lending stores there than McDonald's and Starbucks outlets combined.
He said such prevalence had a devastating impact onthe working poor during the global financial crisis and many US states were now trying to wind back the industry.
Mr Gillam said there was a 48 per cent cap on the annual percentage rate and loan fees in Queensland, NSW and the ACT.
The federal government must decide later this year on whether to keep the cap and extend it nationally as part of the new national consumer credit laws.
"The Australian government needs to act now before the industry becomes entrenched here as well," he said.
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