Are payday loans becoming the biggest social problem on the Coast? Pratsiri Setthapong investigates:
Donna Langley moved from Adelaide to Gold Coast three years ago hoping to work her way towards a wealthy and successful life. She was not aware that she was now living in one of most expensive cities of the country, where the majority of her hard earned money would go to rent; car insurance and registration; gas, electricity, water, phone, internet bills and day-to-day essentials. Her casual job in a local club helps her get by but it does not allow her much of a lifestyle.
It only needed a simple unexpected incident to trigger financial hardship so when her partner lost his job two years ago Donna was worried. He found a job a month later but four weeks lost income had a massive impact on their lives. Before she knew it she was getting far behind all the bills. A couple hundred dollars short turned into a thousand. The only option she had as a person without a full-time job or the credit for a bank loan, was a quick cash shop in the neighborhood. It was quick and easy. She thought she had found a save haven.
Many average to low income earners who live in our fast paced society, where money easily comes and goes, are now either struggling to survive, let alone aspire to a better lifestyle.
The Payday business seized this opportunity to encourage people with the financial problem to see Payday loans as the way out. The industry took off despite, or because of, the economic downturn.
Payday loan is a personal loan service offering small loans from $300 to $2,000 to low income earners. The catch is the significant interest rate. Loan repayments are direct debited from customers’ bank accounts weekly, fortnightly or monthly. The business has been around for more than a decade but the glorious era started in 2008. The global economic crisis wobbled Australia’s financial well being causing job losses and major banks tightened their loan policies. According to the Australian Bureau of Statistics, along with the country’s economic downtrend, the unemployment rate in Gold Coast rose up to 4.02% in 2008 from 3.38% in the last quarter of 2007. The recession continued and saw the unemployment rate rise to 5.69% in 2013. People in default, bankruptcy or with bad credit desperately looked for a financial solution in short term.
Cash Converter, the global pawn broking company, originally focused its business on retail secondhand goods. By 2007 it had shifted its focus to payday lending and became the biggest payday lender chain in Australia. The company’s worldwide revenue growth rocketed 16.4% to $272.7 million in 2013. The growth of its online personal loan service in Australia increased 89% to $26.9 million from $14.2 million in 2012. Out of 148 stores in Australia including franchise-operated premises, 44 branches are located in Queensland – more than any other state. Four of them are located in the Gold Coast area.
The booming market encouraged many other players to enter the market. Money3 offers personal loan up to $20,000 for 30 days to 36 months repayment period. Thorn Group, the company behind Radio Rental has now expanded their service to join the quick cash frenzy under the name of CashFirst. Additionally, there are approximately 30 quick cash stores under the smaller names in the Gold Coast area; the number outstripped the short-term loan shops in many major cities in Australia. 12 stores are located in Southport.
Young people aged of 18 to their late 20s are the main market of the payday loan business. Research conducted in 2011 by Gold Coast City Council reported that 58.3% of young people earn less than $400 a week. Tourism and hospitality industry is the key driver of Gold Coast economy and generates the high rate of part-time and casual job. The unstable employment status exposes young people to the payday loan business.
Donna took out her first loan for $250 after her partner lost his job.
“My family and friends told me to stay away from it, but at that moment I was the only one who working and everything was expensive. You didn’t really have any choice. I tried my luck at the bank but without a full time job, they wouldn’t give me a loan.”
The immediacy is the key feature of this product. Lenders can grant the fund instantly within half an hour. The recent emerged online service makes it’s confidential and easy to access and this attracts more people to use the payday loan. “Last month I moved and needed the money for the truck and to fix up some bills. I just went there and got back out with the $250 cash in my hands”
Donna and many customers are not aware of the actual figures of the loan cost. The Annual Percentage Rate (APR) most payday lenders offer is 300% annually. In the longer repayment period agreement, the cost goes up to 1000% per annum. While the standard credit card APR offered by majors banks in Australia range from 13.49% to 10.99% per annum.
“I didn’t really pay attention to those numbers, I just worried about $53 that I have to pay every week, for about six weeks”.
Payday loan borrowers are not only low income earners either in full-time or part-time employment, businesses also focus on unemployed people who receive benefits from Centrelink. According to Consumer Action survey in 2008, “Although difficult to confirm, between 20% and 30% of borrowers are likely to receive some form of Centrelink benefits. It is possible the figure is much higher.”
Based on Cash Converter figures, the survey also stated that there are approximately 379,000 customers nationwide who take out around 674,000 loans in 2010. This figures suggested that most customers are repeat customers. This back-to back loan leads to ‘debt cycle’
Donna said that in two years, she has taken out loans more than ten times.
Customers continue borrowing new loans and problems occur when they could not stick to the repayment plan.
Veena, a 25 year old mother of two from Coomera, started using payday loans two years ago when she became pregnant with her second child.
“I was on the benefits as well as my husband but it was not enough to get by. I found this ad in the papers and decided to check them out. I sighed up with them and took out the first $300. The last time I took out $500, which meant I had to pay back $120 every fortnight. After two payment I realized that I couldn’t afford it anymore. With all the bills and foods and other things for my kids, I fell behind.”
“I was in default and the debt collector company contacted me. Told me that the money would fold up if I couldn’t pay them back in full. I didn’t know what to do and there was no way that I could pay them back, then they took me to court. By that time I owed them $1,500.”
Veena ended up with the settlement of $30 every fortnight. She paid it off after nine months. She never took any loan again.
Payday loan has been the Government’s concern and in the media attention for many years. Social service organizations across the country have launched legal aid and financial counselling services including the No Interest Loan Scheme (NILS) which offers loan up to $1200 to low income earners and people in financial crisis and aims to protect them from being exploited by the short term and payday loan business. In 2013, The Age National reported the statement of Salvation Army regarding the poverty problem. “There is a link between homelessness and the debt spiral caused by payday loans.”
When Donna was asked about the No Interest Loan Scheme, she understood that the campaign would provide her more option but she also concerned about its processing timeframe.
“I’m pretty sure that there are many people have been struggling like me and also need help. The service I’ve been using give me cash within ten minutes. Most of the time we just can’t wait because.”
Unlike Veena, many low income earners including Donna will continue to use the payday loan service; even it has been known that its system can push many people into the worse financial situation.
“As long as I can manage to pay back my loan, I think I will keep using it. Nobody wants to be in debt but things always happen. It is not easy knowing that I could lose my job any day and those bills will never stop coming.”