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Short Term Gain, Long Term Pain?

It’s funny how noticeable the unfamiliar is, and how quickly the unfamiliar becomes common place. On a holiday to the United Kingdom a few years ago one of the many seemingly trivial differences I noticed was the prevalence of advertising for short term and pay day loans. It’s always the mundane that seems to stand out the most.

The pay day loan struck me as something that I had not known was available at home, it certainly wasn’t any near as heavily advertised. Sure enough probably about a year ago now I began to notice short term, “flexible”, and pay day loans being advertised. The advertising has become so commonplace now that it’s no longer noticeable. It was only after the recent “4 Corners” report on these types of loans aired that I began to pay more attention again, and to think about this type of loan generally.

We’ve all been short of cash at one point or another, and have probably all thought that a small, quick loan to get us over the shortfall period would be very handy. There’s a real question however as to whether the short term loan is worth the potential consequences.

Small Amount Credit Contracts (SACC) are credit contracts for an unsecured loan of no more than $2000, with repayment terms of at least 16 days, but not longer than a year. These types of loans are, amongst others, regulated by the National Consumer Credit Protection Act 2009 (the Act). Under the Act lenders are permitted to charge a maximum 20 percent establishment fee, and a maximum or 4 per cent per month. Other consumer protections include a rebuttable presumption that loans are unsuitable where a consumer is in default of an existing SACC or has had two or more SACC’s in the last 90 days, limiting the amount a consumer can be charged when in default to not more than twice the amount of the original loan, limiting repayments to 20 per cent of a Centrelink recipient’s income, a requirement to obtain and review 90 days of the consumer’s bank statements, and a requirement that warnings be posted online and on premises about the high cost of small amount credit and possible alternatives.

The above protections are really important because research has shown that consumers of SACC’s are overwhelmingly from lower socio-economic backgrounds and are therefore vulnerable to exploitation. It’s a perfect storm when one considers that lenders have been less than diligent in observing the regulations. For example in the recent case of Australian Securities and Investment Commission v The Cash Store Pty ltd (in liquidation) [2014] FCA 926 Justice Davies found widespread disregard for the law by the lender, The Cash Store Pty Ltd. Her Honour found that there was a “wholesale failure of process”, that of 227 contracts where it was alleged that insufficient enquiries were made about the purpose of the loan the failure was proved in 224 contracts, insufficient inquiry was made of the consumer’s financial position in 268 contracts, in 151 contracts there was a failure to verify the consumer’s financial information, and in 277 contracts there was a failure to make even a preliminary assessment of the consumer’s application. A fine of $18,975,000 was ordered against the Cash Store.

Breaching the Act is an offence, which can lead to heavy fines as well as civil penalties. There are also a wide variety of remedies open to the Court for the benefit of consumers. It’s ASIC’s responsibility to regulate the industry, and they certainly will have their hands full. If you do find yourself in need of quick fix, why not follow the time honoured tradition of hitting up mum and dad? If that’s no good and you need a loan, remember that you have rights too. After all, that’s the law!

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