What are payday loans?
Payday loans are high-cost, short-term loans. These types of loans are often targeted at disadvantaged consumers.
The NCCP Act distinguishes between four types of loans:
- short-term credit contracts;
- small amount credit contracts;
- medium amount credit contracts;
- all other loans.
This section examines the first three type of loans.
Short-term credit contracts
Since 1 March 2013, ‘short-term credit contracts’ have been prohibited under section 133CA of the NCCP Act. A short-term credit contract is defined as having a credit limit of $2000 or less and a term of 15 days or less (s 5(1) NCCP Act). This definition does not extend to loans offered by authorised deposit-taking institutions (e.g. banks and credit unions) or to ‘continuing credit contracts’ (e.g. credit card contract; see also s 204 NCC).
In September 2019, the financial services regulator, the Australian Securities and Investments Commission (ASIC), exercised its product intervention power to ban a model of short-term lending used by Cigno Pty Ltd, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd, and BHF Solutions Pty Ltd. The law states that short-term credit providers only remain exempt from responsible lending obligations if the fees charged for loans of up to 62 days do not exceed five per cent of the loan amount and do not have an interest rate that is greater than 24 per cent per annum.
On 29 June 2021, the Full Court of the Federal Court dismissed an application for judicial review by Cigno to challenge ASIC’s product intervention order. At the time of writing (1 July 2021), no appeal had been lodged by Cigno; the product intervention order lapsed on 18 March 2021.
In July 2020, ASIC released ‘Consultation Paper 330‘, in which ASIC proposes to use its product intervention power again to ban another similar class of financial products: high-cost continuing credit contracts.
Small amount credit contracts
The NCCP Act contains provisions relating to small amount credit contracts.
The NCCP Act (s 5) defines a ‘small amount credit contract’ as a contract where:
- the credit limit is $2000 or less;
- the term is at least 16 days but not longer than one year;
- the credit provider is not an ‘authorised deposit-taking institution’ and the contract is not a ‘continuing credit contract’; and
- the consumer’s obligations under the contract are not secured.
Since 1 March 2013:
- a credit provider must obtain and consider a consumer’s bank account statement covering at the least the immediately preceding 90 days as part of its responsible lending assessment (s 117(1A) NCCP Act); and
- there is a rebuttable presumption that if a consumer is in default under an existing small amount credit contract, or has had two or more small amount credit contracts in the immediately preceding 90 days, the consumer will only be able to comply with a new small amount credit contract with financial hardship (s 123(3A) NCCP Act).
Since 1 July 2013, section 31A of the NCC has limited the amount of interest, fees and charges that may be imposed by small amount credit contracts to:
- an establishment fee not exceeding 20 per cent of the amount of credit a borrower receives;
- a maximum monthly fee not exceeding four per cent of the borrower’s amount of credit;
- default fees or charges; and
- any government fee, charge or duty payable.
In addition, section 31A(1A) of the NCC bans establishment fees under small amount contracts entered into for the purpose of refinancing another small amount credit contract. Section 39B of the NCC limits the amount payable if there is a default to twice the amount of credit received by the borrower, plus reasonable enforcement expenses.
At the time of writing (1 July 2021), there is a Bill before the Senate that relates to consumer leases and payday loans (i.e. small amount credit contracts). For more information, see ‘National Consumer Credit Protection Amendment Bill 2019’ in ‘Consumer leases‘.
Medium amount credit contracts
According to section 204(1) of the NCC, a ‘medium amount credit contract’ is similar to a small amount credit contract, save that the credit limit is at least $2001 and not more than $5000, the term of the contract is at least 16 days but not longer than two years, and the consumer’s obligations under the contract can be secured.
Since 1 July 2013, a medium amount credit contract cannot have an annual cost rate higher than 48 per cent (s 32A NCC). The method for calculating the annual cost rate is set out in section 32B of the NCC. However, in addition to this amount, an establishment fee of up to $400 may be charged (s 32B NCC).
Advice for consumers of payday loans
Before taking out a payday loan, consumers should speak to a free, community based financial counsellor about managing their debts or alternative funding options. These may include hardship variations for bills, energy relief grants, emergency assistance, Centrelink advances, and low-interest loan schemes (see Chapter 5.4: Financial counselling services).
If a consumer has entered into a payday loan, they should consider whether the lender has complied with its obligations (see ‘Unjust contracts’ in ‘Varying, re-opening and terminating credit contracts‘) and decide whether a complaint to a dispute resolution scheme is warranted.