In the booming payday lending sector, dubious new tactics are hooking the poor and the desperate. By Jonathan Pearlman and Jo Lennan.

Life after debt with payday lending

Watching the end of Deal or No Deal before the evening news, Paul Gardener saw an advertisement he thought would solve all his problems.

Gardener, 27, had quit his job as a supermarket manager three years earlier when his mother developed breast cancer. He started caring for her full-time, switching from his $1000 weekly income to a carer’s pension of about $400 a week.

The drop in income left him struggling to pay his $850 a month rent for a share apartment in the Melbourne suburb of Footscray. And then, early last year, he saw an advertisement that promised fast easy cash. 

“I saw the ad on TV – they always play the Cash Converter ads down here – and I thought, ‘There’s a store just down the road, there’s no harm in trying to get [a loan],’” he told The Saturday Paper

The next day, Gardener walked the two blocks from his flat to the nearest of the company’s 150-plus stores across Australia. “I just went in to inquire about it and straight away they hooked me up with a personal loan and a cash advance at the same time,” he says.

Gardener filled out a handful of forms. Five minutes later, he walked out of the store with $350 in cash. A further $1000 was transferred to his account three days later. 

“I was overwhelmed. I was surprised I could get the money there and then on the spot. I just thought this was an easy solution – it solved all of my problems.”

Gardener had said he received his weekly carer’s pension on Wednesdays, so Cash Converters – the country’s biggest payday lender – began taking money out of his ANZ bank account every Wednesday about 9pm.  

Gardener discharged the $350 loan, which cost about $480 in repayments over six weeks – equivalent to an annual interest rate of more than 300 per cent. But, a month later, he began to fall behind on his rent again. So he walked back to Cash Converters for another loan. He ended up taking out six loans in a row and then realised he could borrow money without turning up at a store. 

A search for “payday lending” on Google quickly retrieves an entire online smorgasbord of fast lenders, where firms such as Jet Lending, PaydayLand and Money Buddy make claims such as, “Don’t worry. Get up to $1200 paid within 60 minutes” and “Need cash fast? … Takes 4 minutes.” 

If you earn more than $50,000 a year, you’ve probably never heard of them and you may have a 5 or 6 per cent mortgage from a major bank; if you earn less, you’ve probably been tempted by one of these fast cash options without realising the interest rates could come to several hundred per cent.

Gardener applied for a $700 payday loan with Gold Coast-based City Finance and received the funds that night. Perhaps the easiest of the loans was from Ferratum – “No paperwork, no meetings, no judgement” – whose application involved nothing more than a quick online questionnaire. The firm sent him a text message that night to say he had been accepted for a $200 loan.

“They send you a text and you just reply if you want to sign the contract, so I did,” he says.  

After a $500 follow-up loan obtained from Ferratum’s website, Gardener’s jumble of loans began to unravel. “From [that] stage it became too much for me,” he says. “I was struggling.”

Gardener did not know that most of his loans were unlawful. The lenders had breached the law by issuing rollover loans or overlooking his two existing loans when they deemed him suitable. Pressed by a lawyer at the Consumer Action Law Centre, the firms all waived the remainder of his debts, but none would admit wrongdoing.

1 . Luckless borrowers

Speak to anyone who deals with the poor and hard up and they’ll tell you the same thing: Gardener’s case is far from the worst. In a growing industry that lends to an estimated million Australians, dubious tactics are hooking the harried and the desperate. The loans may appear ludicrously expensive but the customer base is huge: about three million Australians lack the finances and credit rating to borrow from mainstream banks. Many of these luckless borrowers are on welfare but an estimated 40 per cent have jobs that pay too little for them to secure a loan.

The working poor and the jobless provide ripe targets for payday lenders. The sector has developed new practices to lure those on low or no incomes and persuade them to take out repeat loans, often with scant regard for responsible lending rules. Some send out birthday cards; others send ATM cards that are loaded with loan money. Loans via text message, apps and websites can be approved within seconds.

Joe Hockey, back when he was a minister for financial services in the Howard government, described the industry as “insidious”. We asked the treasurer, a former banking and finance lawyer, if he stood by the criticism, which he made in a media statement in November 2001. He refused to comment. 

“The financial system inquiry is looking at the issues – including how consumers access credit,” says his media adviser, Mike Willesee. “It would be premature and inappropriate to comment prior to this.”

The deputy chairman of the Australian Securities and Investments Commission, Peter Kell, agreed to speak about his concerns, telling The Saturday Paper that Australia needs to avoid following the path of Britain, where authorities last year found that unlawful lending was causing “widespread misery and hardship”. 

 “If we’re not careful you can see some of the most vulnerable members of the community ending up in very bad circumstances,” he says. 

“There’s no doubt that when you look at some of the worst examples of the payday lending industry in Australia, or the way the industry has treated consumers in other countries, that this is an area that needs close regulation. It can go badly wrong. We want to stop that in Australia.”

ASIC has repeatedly uncovered cases of dodgy lending, including elaborate schemes to lure some of the nation’s poorest people into debt. It launched a case earlier this month alleging that two Gold Coast lenders – Teleloans, and Finance and Loans Direct – have been charging interest rates of 160 per cent. 

In a separate action, a lender called Cash Stop was forced to provide refunds to more than 650 customers who had been charged unlawful membership fees, while another lender, The Cash Store, was targeted for unconscionable conduct. ASIC also uncovered an elaborate bogus scheme for the sale and purchase of non-existent diamonds, which was one Queensland lender’s tactic to evade interest rate caps. 

Others are also taking action to enforce the caps. Law firm Maurice Blackburn has brought a $40 million class action against Cash Converters for allegedly overcharging interest. 

Kell says ASIC plans to crack down on unlawful lenders and is concerned about the rise of online lenders operating offshore. When targeted for breaches, such lenders can reappear, phoenix-like, under new trading and domain names.

 “We need to be targeting unlicensed providers, those operating outside the laws and those who imagine they can get away with charging whatever interest rates they like,” he says. “Dealing with overseas-based sites, especially if the operators are not particularly interested in playing by the rules, can be very, very challenging.”

The Consumer Action Law Centre has seen people with up to 35 advances from various lenders. Gerard Brody, of the centre, says most borrowers are using the money for essential services such as food, utility bills and rent. Such people would not be able to access loans from responsible lenders, who look at a prospective borrower’s excess income – which would come to zero for many clients of these so-called fringe lenders. 

“Often people start with a one-off problem like a car breaking down and needing the cash to pick their kids up and get out of a bind,” he says. “They are driven by desperation.” 

Brody said some borrowers would be eligible for other forms of assistance such as NAB’s microfinance and no-interest loans, but many people do not realise there are other options – and the cash advances are quick and easy.

One borrower who was offered an ATM card is Robert Porter, 52, a former plasterer from Sydney’s Waterloo. Porter receives a disability pension for a brain injury he sustained in a car accident. He amiably describes himself as gullible, adding, “I was an easy target.” 

After borrowing $1000 to pay for his wedding in 2005, Porter took out a series of rolling loans over a seven-year period, spending the money on everyday expenses. Soon he was on first-name terms with the staff at his lender, City Finance, which he said never turned him down for a loan. As he paid off his loans, Porter received letters offering new ones.

“I said yes like a bull at a gate,” he says. Then he received a letter offering “the latest form of lending”, an ATM card worth up to $600 that could be “topped up” with a single phone call. “This saves you time and gives you the benefit of funds appearing instantly on your Ready Cash Card,” the letter read.

Porter ignored the offer. “I’m not that stupid,” he says. Even so, he struggled with overlapping loans until, seeking help from Redfern Legal Centre, he learnt his outstanding loans did not pass legal muster. City Finance wiped his debts and wrote him a cheque for $75.

2 . Online lending

An even bigger innovation has been online lending. This makes borrowing fast and easy, not to say discreet. One borrower who spoke to The Saturday Paper described taking out online loans without speaking to a single person. The 42-year-old mother of two, of Deer Park in Melbourne, did not wish to be named.   

When she took out her first payday loan, she was holding down a full-time job in administration but spending much of her money on a pokies addiction. She looked up the website of Cash Train, a West Australian company, after seeing its television advertisement. “It was a very faceless transaction,” she says. Before long, her loan amounts jumped from $200 to $500.  

“Being able to do everything online, that was the deciding factor … They gave me enough rope to hang myself.” 

The ALP made a concerted effort to rein in the lenders in 2012, though the proposed changes were watered down following heavy lobbying by the industry. Cash Converters alone hired two leading lobbying firms, Hawker Britton and GRA Everingham. Mathias Cormann, now the finance minister, led the Coalition’s assault on the changes, accusing Labor of an “ideologically driven attack on the payday lending industry”.

Eventually, the legislation’s proposed cap on upfront fees was reduced from 20 per cent of the loan to 10 per cent, while a cap on interest fees was doubled from 24 to 48 per cent a year. 

ASIC’s Peter Kell says the regulator is still examining the impact of the changes but flagged that there may be a need for laws to target lenders who deliberately find ways to avoid the new protections.

“The requirements came into place a year ago, so we’re still assessing what sort of impact they have in raising standards in the industry,” he says.

Cash Converters says it lobbied “the relevant ministers” for a higher interest rate cap to ensure that the nation’s short-term lenders remain viable. According to a spokeswoman, the new laws include “some of the most stringent and far-reaching regulatory devices applied to short-term lenders in the world”.

“The industry has had its fair share of ratbag operators over the years, but we’re happy that the government chose to retain the industry by cleaning it up and better protecting people who use it,” the spokeswoman tells The Saturday Paper.

“For the minority of our customers who have few other credit options, we offer a safe choice … We help our customers by assisting them to solve a short-term money problem, and 97 per cent of our customers pay back their credit in full.”

3 . Small and legal

How did we get here? High-cost lending is not new; usury is older than the Bible. The payday loan can be traced to the United States in the late 1800s, where workers illegally borrowed money before they received their wages. 

What is relatively new – in this country at least – is a booming, legal, small-loan sector. Australia’s first payday lender opened its doors in Queensland in 1998. In 2001, there were 82 businesses. By 2008, there were more than 800. In the past decade, fringe lending has grown faster than any other sort of finance.

A 2012 study led by Marcus Banks from RMIT University connected payday lending’s rise to broader changes in the economy, namely the decline in manufacturing jobs and the rise in long-term unemployment. 

Though the payday loan is a part of life for many on low incomes, it is a part of life they are reluctant to speak about. The reticence comes partly from shame and partly from the grim knowledge that they might need credit again soon. “It was a very secretive part of my life,” says the mother from Deer Park.

The industry’s rise and rise has not garnered much attention here. Not so in Britain, where post-global financial crisis payday lending has been huge news. There the sector is worth £2.8 billion ($5 billion) and regularly lends money to two million people. Watchdog reports have shown abuses to be rife. In a reference to the country’s biggest payday lender, which is notorious for having sent threatening letters on fake legal letterheads to 45,000 customers, opposition leader Ed Miliband last year decried the country’s “Wonga economy”. 

And in the US, the home of payday loans, more than 12 million people use the lenders each year, according to The Pew Charitable Trusts. The loans total a staggering $30 billion. While some states ban payday lending and others restrict it, many online operators seek to flout the rules. Some, such as Western Sky Financial, have claimed ties to Native American tribes and immunity from state and federal laws while charging 355 per cent interest rates. 

Debates abroad have parallels here. Talk of banning payday loans frequently meets with the response that black-market sharks would undoubtedly be worse. And alternatives are canvassed: in Britain, the Archbishop of Canterbury, Justin Welby, is setting up a church-backed credit union to run Wonga out of business, while the inspector general of the US Postal Service recently proposed using its branches to offer discounted small loans. 

With the industry’s ills falling under a spotlight in the federal government’s financial services inquiry, chaired by former Commonwealth Bank head David Murray, there have been renewed calls to sanction the sector and foster alternatives. National Australia Bank told the inquiry that no mainstream banks provide payday-style loans and the government should consider ways to help poorer borrowers. 

“Government should give consideration to supporting new and existing microfinance alternatives that will provide fair, affordable and competitive small amount loan alternatives to those Australians experiencing financial exclusion,” it said.

In a separate submission, the Financial Rights Legal Centre called on the government to support community-based schemes to offer low-income earners no- or low-interest loans. It said the effect of high-cost, irresponsible lending was to “kick people while they are down”. The financial system, it argued, should not seek to “compensate for inadequate income support”. 

And there’s the rub. Payday borrowers are poor. The evidence shows most seek out loans because they are struggling to make ends meet. In an economy long skewed by the mining boom, the cost of living has risen sharply; many incomes have not. One of the main recommendations of the Caught Short report was also the least likely to be implemented – that welfare payments should be increased to the pension rate, with additional help for those on disability support. In the wake of May’s federal budget, that sort of largesse is less likely than ever. 

4 . Fixing the problem

For now, the great challenge is enforcing the law. In its submission to the Murray inquiry, the Financial Rights Legal Centre said, “Breaches of the responsible lending laws are endemic in this part of the industry.” 

Can poor practices be fixed? The Consumer Action Law Centre’s Gerard Brody says the changes to the sector have made “little difference” and caps should be placed on the number of annual loans. Australia should follow the lead of some states in the US and set up a central register of loans that would allow lenders to check whether borrowers were already in heavy debt.

“The whole industry is set up to rely on multiple loans and is targeting the most vulnerable and steering them into a trap. If it was only offering one-off emergency loans, we would have much less of a problem with it.”

Such changes could leave some without credit for periods of time. Not all would welcome the move, yet putting a stop to loans makes a difference to some. The Deer Park mother told The Saturday Paper she was unable to get new loans when lenders started checking her bank statements for defaults. After hitting financial rock bottom, she started gambling counselling and had herself banned from more than 100 pokies venues. She is now studying for honours in sociology. 

Paul Gardener, who has likewise learnt to live without the loans and is studying business management, puts it this way: “At the time when you need something and they offer you something and that is all you can get, you take it … They made it so easy.”

This article was first published in the print edition of The Saturday Paper on Jul 26, 2014 as "Life after debt".

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Jonathan Pearlman is The Saturday Paper’s world editor and the editor of Australian Foreign Affairs.

Jo Lennan

writes for the Monthly and The Economist Group.