The complexity of payday loans


Stricter payday loan laws may be needed to prevent vulnerable people from accessing loans they cannot afford, but as a former debt collector and financial advisor points out, she fails to recognize driving forces.

Gregory Mowle, professor of economics at the University of Canberra, interviewed about 50 people who received payday loans as part of a financial literacy study on why they needed access to quick money.

The results were varied and complex.

Cultural factors, housing costs weigh heavily on low-income people

“A lot of these people don’t have enough money to survive,” he said.

“Everyone I interviewed had a story of why they borrowed, and it wasn’t just a lack of financial knowledge or money for drugs.

“Sometimes it was to pay for things like funeral expenses for a relative in another country or because an unexpected bill popped up.”

Mr Mowle found that those who took out payday loans often struggled with housing affordability and risked being caught off guard.

“I went to interview people in West Sydney and some of them were paying 60-70% of their income in rental fees. That left them little room for an unforeseen cost – like a gas bill, urgent repair of their car – stood up.

“What is being offered by these consumer groups makes sense … but what about the many people who will find themselves unable to borrow and access an interest-free loan? Do these people then become a burden on family members or friends when they cannot borrow from someone else? “

Mr Mowle spoke of a case where a family in the Pacific Islands applied for payday loans to pay for the one-time funeral expenses of a relative abroad.

“If you didn’t, it was considered shameful and therefore this family felt they had no choice but to seek out a payday loan.”

Stigma around seeking financial advice from charities

One of the options offered in lieu of payday lenders, according to Mr Mowle, is for clients to use nonprofits, such as the Salvation Army, to access Interest Free Loans (NILS). or help with financial literacy, according to Mowle.

But he said 49 of the 50 people he interviewed were not eligible for the loans and wanted to be able to look after themselves.

This led them to seek payday loans instead of seeking help from charities.

“This shows, I think, some of the emotions and thoughts behind this debate and makes it a lot more complicated.

“The other side of the problem is that NILS loans take another two days or more and typically clients who turn to payday lenders are facing a crisis that they believe needs to be addressed immediately.”

Customers value simplicity over higher interest charges

Mr Mowle said in a case study that a man in his 20s was living on a caregiver’s pension while caring for his ailing father.

The man didn’t have much of a life outside of caring for his father and he often felt judged for wearing old clothes, so he went to a payday lender and borrowed $ 600 for new clothes. .

As he was in receipt of a caregiver’s pension, he was unable to obtain a bank loan and instead turned to a NILS provider.

“He told me he didn’t like the extra time it took to fill out the papers and run,” Mowle said.

“He felt that the time involved outweighed the higher interest payment on a payday loan.

“He also felt that the payday lender was okay with his decision to use the money to spend it on clothes and he was more comfortable paying higher fees than having to run around.”

Mr Mowle said he knew people would like to reduce the problem to a point where people should be advised to apply for interest-free loans or not be allowed to borrow.

But he said the reasons for borrowing were complex and should not be left out in policy considerations of how to address concerns about payday loans.


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