`easy' Money
Sun Herald
Sunday October 1, 2000
Skint, credit card cancelled, no money until pay or pension day but you need $200 fast. John Synnott checked out payday loan shops.
JUST as Alan Bond is reportedly backing a chain of mini-banks in Britain, similar payday lending shops are popping up all over Australia.
They offer high-interest rate, short-term loans of $100 to $1,000 and will also cash cheques for 3 to 7 per cent commission.
Hailing from the Gold Coast and Perth, 20 payday lenders have sprung up in NSW and 80 in Australia, and there is talk about a stock exchange float and franchising.
In inner Sydney's Newtown there are two new arrivals, Australian Money Xchange (AMX motto: ``Everyday's a Payday!") and Cheque Xchange. In nearby Petersham there is Cash Stop ``We Now Offer Payday Advances!".
A nearby Newtown pawnbroker will hold your jewellery, camera or golf clubs and $40 to lend you a quick two hundred bucks. You pay back the $240, you get the golf clubs and that's 20pc or 240pc annualised.
But some traditional pawnshops are following the payday loan shops, offering loans ``until next payday" without collateral.
They are all exploiting a loophole in credit laws, allowing them to charge well over the 48pc NSW annual interest limit because their loans run less than two months.
A visit to Newtown's AMX led to a quote of a $25 membership fee and $44 to borrow $200 for two weeks. Processing time was quoted within two hours.
``There is absolutely no interest it is a flat rate," said the counter assistant.
Call it what you like, but that's about a 570pc annualised interest rate without the joining fee and you repay $269.
Cash Stop quotes ``$245 or $250" payback for $200, somehow calculated on the basis of 5pc per week (260pc) plus $19.95 joining fee.
ChequeXchange quotes a payback of ``about $240 to $260" on the phone for borrowing $200. The exact price depends on risk whether the borrower has a job or income or pension, can produce ID, telephone bill and rent receipts.
Behind AMX is Rod James from the Gold Coast who says the average wage earner on $30,000-35,000 runs out of cash six times a year.
``Short-term loans help the battler with his car rego, paying his telephone bill instead of a $50 reconnection fee," Mr James said.
``Australian banks have been good until recently but they are closing branches and not lending short-term.
``Twenty years ago you could have borrowed $300, but not now. You will not get an answer for two weeks."
He rejects the claim that the high fees can leave borrowers over-committed and unable to repay and afford the necessities of life without rolling over the loan in a debt trap.
``We would not allow people to do it more than five times," said Mr James.
The risks can be frightening.
One borrower obtained a $50 advance from a payday shop, to be repaid in two weeks. This was rolled over with the amount outstanding increasing each time, until 10 months later he owed $900.
This attracted a fee of $192 every fortnight. The loan was outstanding for six months for which the consumer was paying an effective interest rate of 555pc.
In another case, a couple borrowed $120 initially in August 1999. Again, this amount was rolled over. Sometimes they managed to pay off some of the principal, but mostly the amount outstanding crept up each fortnight.
Eventually in November, three months later, they owed $680, which attracted a fee of $272. They then fell into financial difficulty the husband lost his job and their car broke down, in addition to the usual Christmas expenses.
Two days after the repayment was due, and without any notice whatsoever, the payday lender repossessed their car, worth thousands. The amount owed was less than $1,000, including the fee.
The payday lender then demanded an extra $500 in repossession and late fees before the consumers could get the car back.
A change in the credit code four years ago prompted the payday loan shops.
It requires that lenders take into account the borrower's capacity to repay. If they don't, courts can re-open the contract and this means the lenders risk losing their money.
This law may have made lenders more cautious about borderline cases, opening a market up to payday lenders, according to Broadway Credit Union's Bob Mann.
``Thirty-six per cent interest to the next payday could reflect risk, or it could reflect profiteering," he said.
Banks offer money at a fraction of that cost, but are not interested in very small amounts. The Commonwealth Bank's Blacktown branch, for example, has a minimum borrowing of $3,000 on a personal loan.
It says a $100 loan suits a credit card (annual interest only 16pc). If you've not been meeting repayments on your existing card, you can try for an increased limit and promise to improve your ways, or ask for a quick overdraft on your savings account (11-12pc annual).
The banks claim 24-hour loan approvals, but they haven't told their branches, which quote three days to a week before you get your money.
The Queensland and NSW governments are considering legislation on payday lenders.
© 2000 Sun Herald
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