Estimated read time: 2-3 minutes
Start rating: *****
Topics: Australian Credit Licence CPD
The popularity of payday loans has never been higher. But should we view small and medium amount loans as friend or a foe?
It’s no secret that the rising cost of living is a genuine issue for many Australians. In fact, many political commentators have argued that Prime Minister Morrison’s promises to address rising electricity costs and put money back into the pockets of everyday Australians were key to his party’s success at the recent Federal Election.
As more and more Aussie families struggle to make ends meet, a growing number are turning to payday loans to cover regular household bills. In fact, payday loans, or small and medium amount credit contracts (SACCs and MACCs) as they are officially known, made up more than 95% of all loans issued by providers of consumer credit in 2016.*
Why SACCs and MACCs are so popular
There are actually a few factors that have led to the increased take-up of SACCs and MACCs in recent years, the rising rate of financial stress being the most obvious. Indicators of financial stress include:
- Households that experiences a cash flow problem over the past 12 months, such as being able to pay bills on time
- The inability to raise $2,000 within a week for something important
- Households that have taken a dissaving action in the past year, such as drawing on savings or increasing a credit card limit.
According to research commissioned by the National Credit Providers Association (NCPA) in 2017, 64% of working Australians reported that they would be unable to access $1,000 or more in the event of a financial shock. In addition, 81% of consumers surveyed for the NCPA research said they would struggle if they were unable to access small amount loans.*
Who is signing up for SACCs and MACCs?
The typical SACCs customer, according to the NCPA research, is in their mid-30s and earns the majority of their income from employment. They are looking for small amounts that will assist with paying ‘generic household expenses’ (39%), ‘generic bills’ (19.7%) or ‘utilities and telecommunications bills’ (10.7%). Payday loans appeal in these scenarios because they provide access to cash in a hurry, combined with a simple repayment process.
Whereas credit cards, personal loans and mortgage-related products (to name a few) require borrowers to undertake lengthy and detailed application assessments and to demonstrate a positive credit history, SACCs and MACCs promise customers quick fulfilment, minimal paperwork (some applications are processed entirely online) and simple terms. In fact, this positive and convenient approach to lending is why 72% of small loan borrowers chose to go down the SACCs/MACCs route in the first place.*
This convenience does, however, mean SACCs and MACCs are particularly attractive to people with low financial literacy and those at risk of financial hardship.
The need for responsible lenders
Despite a range of legislative enhancements targeted at protecting small loans borrowers being introduced over the last decade, in 2018 a Senate inquiry was undertaken into credit and financial products targeted at Australians at risk of financial hardship. Core to the Senate inquiry’s recommendations was that, regardless of the wide range of business models and practices utilised by providers of SACCs and MACCs, all such products were found to pose an oversized risk specifically to Australians in financial hardship.
The Government took swift action, drafting the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2019 which incorporated a number of the Senate Committee’s recommendations in relation to small loans. However, this Bill has now lapsed, due to the dissolution of Parliament for the May 2019 Election.
Nonetheless, payday lenders are subject to responsible lending obligations, including additional requirements that apply directly to providers of SACCs.
- Making reasonable enquiries into a consumer’s requirements and objectives, i.e. why the customer requires the loan and whether the particular credit contract will meet that purpose
- Providing a SACC loan warning that notifies the borrower of their options before they borrow money
- Obtaining and considering bank account statements for the potential borrower for the preceding 90 days.
The market for payday loans is not likely to diminish in the near future. But we all have an obligation to ensure that these products do not directly disadvantage those they are intended to assist. In the absence of specific small loan legislative reforms, it is more critical than ever that licensees ensure they comply with their responsible lending obligations.
With meaningful dialogue and sensible reform, regulation of Australia’s payday lending sector can strike the right balance between facilitating access to credit while ensuring appropriate levels of consumer protection.
We cover SACCs and MACCS and alternative finance solutions in the specialist Personal Loans topic of our Australian Credit Licence CPD.
* NCPA CoreData Small Amount Credit Contract Research, December 2016