ON the face of it, charging effective interest rates of 1000 per cent on small loans to desperate clients is a predatory and indefensible practice.
NSW Fair Trading Minister John Watkins went as far as describing payday lenders — which charge such effective interest rates — as “bottom feeders”.
Their older cousins — pawnbrokers — have also been subject to unflattering scrutiny over the years.
But apart from begging or stealing, where do the down and out — or those suffering a short-term cash crunch — go for a short-term loan?
Most consumers resort to credit cards and, with a bit of luck, manage to repay the debt before the end of the interest-free period.
But for those ineligible for a credit card or personal loan — or who do not have a bank account at all — the answer is not so simple. Hence the proliferation of payday lending outlets such as ChequEXpress, Australian Money Exchange and Money Plus.
Payday lenders advance funds for a week or two until the borrower’s next pay cheque. They also cash cheques for a fee.
Consumer groups have gathered a litany of horror stories about over-the-top fees and interest rates.
As a result, the states’ fair trading ministers have tabled legislation seeking to regulate payday lenders.
However, industry spokesman Peter Llewellyn argues that payday lenders fill a void left by the banks.
“They are coming to us because there is no other alternative,” he says.
Llewellyn, who is head of the Australian Money Exchange chain, says claims of exorbitant interest rates — based on an annualised figure — are nonsense.
According to Llewellyn, AMX incurs between $18 and $20 of costs for every $100 lent. AMX customers are charged $22 per $100 advance per week, plus a $25 “joining fee” for 12 months. The imposts are justified given the high risk involved with unsecured lending, he says.
Pawnbrokers cover their risk by requiring collateral. Unlike payday lending, where non-repayment leads to the accumulation of fees, the borrower’s risk is capped at the value of the hocked asset.
Pat Barrett, who operates Brisbane Pawnbroking on the city’s north shore, says customers typically are charged $20 to $30 per month for every $100 borrowed.
It’s not an interest rate as such, but an agreement to buy back the goods at an agreed price. The pawnbroker “buys” goods used as security for about half their secondhand value. The asset becomes the property of the pawnbroker if not collected within three months.
“We cater for the $500 and under market which banks don’t want to know about,” Barrett says.