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Payday lending and rent-to-buy products are often a source of financial distress and hardship according to Consumer Action Law Centre. The centre welcomes the Federal Government’s announcement that it will be reviewing the laws regulating payday lenders and rent-to-buy companies.

These businesses are booming as everyday Australians struggle to meet day-to-day expenses. Researchers estimate the payday lending and rent-to-buy markets are valued at more than $1 billion and $525 million respectively.[1] Both markets are growing quickly, with the payday lending market alone predicted to grow to $2 billion per annum by 2018.[2]

Payday loans and rent-to-buy products are excessively expensive, meaning the poor are paying more for essential household goods and credit. The legislated cap on fees and interest for payday loans hides annualised interest rates exceeding 240%, while rent-to-buy products can end up costing customers two to five times more than standard retail price.

‘The industry often claims that they’re helping people access essential items and credit, but more often than not these high-cost credit products make bad financial situations even worse’, says Gerard Brody, CEO of Consumer Action.

‘A key issue for the inquiry is how to protect the vulnerable from ongoing reliance on very high-cost credit. One way to do that is to reduce the amounts of fees and charges that can be imposed’.

Brody has also urged the review to look at how these businesses attempt to avoid regulation, arguing that there has been a long history of avoidance strategies employed by fringe lenders across the credit industry.

‘Rent-to-buy businesses are effectively exploiting a loophole that has allowed them to dodge controls in place for other lenders. The very fact lenders are using avoidance strategies suggests that we need stronger anti-avoidance provisions so the regulator is not stymied when they seek to enforce the law.’

Brody also says the review must consider the lived experiences of people targeted by these businesses.

‘The reviewers must speak to Australians who have used these products in order to understand their circumstances and the harm these products can cause. It’s pleasing that the reviewers will consult widely, and this should include financial counsellors and community lawyers who are dealing with the impact of these products on a daily basis’.

Editor’s notes:

Direct experience? We have financial counsellors and lawyers willing to speak to media about the impact of payday loans and rent-to-buy products. With appropriate notice we can also help source clients and personal stories.

What is rent-to-buy?

Rent-to-buy arrangements are legally known as ‘consumer leases’. A consumer lease is a contract for the hire of goods where:

• the hire is for domestic or household purposes;
• the person hiring the goods does not have a right or obligation to purchase the goods; and
• the total amount paid by the consumer is greater than the value of the goods being rented.

Consumer lease providers often rent basic household goods such as electronics, whitegoods and furniture to consumers. By the end of the contract, the consumer will typically have paid 2-5 times the normal retail cost. See our report on the hidden cost of rent-to-buy here. A number of rent-to-buy companies also have access to Centrelink’s bill paying service, Centrepay. For further information, see our media release here.

What are payday loans?

Payday loans are unsecured loans for up to $2,000 that are repaid in 12 months or less. Lenders often set up direct debit repayments to withdraw money from borrowers’ accounts’ on their payday or pension day. This means that the lender may get paid before the borrower has had a chance to allocate sufficient money for groceries, rent, medicine and utility bills. It can mean borrowers don’t have enough money to last until next payday, leading them to harmful cycle or repeat borrowing. See our infographic on payday lending here and our infographic on consumer leases here.

[1] http://www.digitalfinanceanalytics.com/blog/pay-day-hot-spots/ and Credit Suisse, ‘Risks in payday lending and goods rental’, March 2015.

[2] http://www.digitalfinanceanalytics.com/blog/pay-day-hot-spots/