The Australian Federal Government today introduced a new bill to cap payday loans under $2000 to a maximum of 10% with the monthly interest rate set at no more than 2% but the Australian finance industry hit back with claims it would drive them out of business if the bill is passed.
The Australian arm of Cash Converters is the biggest payday loan lender down under and their spokesman Glen Donaldson claims the average payday loan is for $300 which the customer repays within 30 days together with a fee of $105. This puts their charges at $35 per $100 borrowed for each month.
Donaldson told the government that the cost to a Cash Converter store for each $300 payday loan is on average $76 – making them a profit of $29. He claims if the governments new bill is passed they would only be able to charge around $36 for the same loan meaning that offering payday loans would no longer be a viable business.
Stepping in to the argument is the National Financial Services Federation who’s chairman has gone on record as saying he believes a cap should be set at around $30 for each $100 borrowed and anything less would be under the operating costs of the payday lenders.
Also on the bill are reforms to force payday lenders to first advise potential customers about other alternative and less costly instant cash loans. Payday lenders would also be banned from rolling on the loan into a further month which often leads to the customer paying more interest than the original payday loan amount.
As in the UK, the average customer of a payday loan is a middle income earner looking to avoid an overdraft charge or a late credit card payment fee rather than the poor or disadvantaged the Australian Government claims it wants to protect.
While there is no doubt that the disadvantaged do turn to payday lenders and they do need protecting, by banning payday loans – and that is what they will be doing if this bill is passed – the Government will simply open the way for the illegal loan sharks to step in and fill the void left by the closing payday businesses.
It seems many Australian consumers agree that driving payday lenders out of business is not such a good idea. A ‘No Cap‘ petition started by Cash Converters when it began asking customers to add their names to a list of borrowers who were against the proposed changes had grown into a full blown national campaign with well over 30K people signed up at the time the petition was closed.