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Finance Regulations

From NFP to payday loans: the rise of small credit

2 min read

Not-for-profits (NFPs) are leading the way for low-income microfinance while ‘payday lending’ matures in a move to target professionals. 

The small loans space is infamous for its variation in quality; on one end of the spectrum, there are not-for-profit microfinance organisations, while at the other end, a handful of high-profile payday lenders.

NFP microfinance is reserved as a method of emergency finance for low-income households. Good Shepard Microfinance is one example of a not-for-profit in the microfinance industry.

“We offer a suite of people-centred and affordable financial programs for people on low incomes,” states Good Shepard’s website.

On the other hand, Small Amount Consumer Credit (SACC) loans exist on the commercial end of the small credit industry. Also known as ‘payday loans’, this form of finance is experiencing rapid growth and is tipped to reach the $1 billion mark by 2018.

While the potential utility of these small loans is recognised, their rise in popularity has also prompted a government review to ensure that poor quality commercial lenders are weeded out.

“We recognise that [payday loans] play an important part in the economy, in giving people access to credit where they may not be able to access it through mainstream finance,” then Assistant Treasurer, Josh Frydenberg, said to ABC’s AM radio back in August.

“We need to ensure that the laws are fit for purpose and that the regulations strike the right balance.”

This government review comes at a time of significant growing pains for the payday loans segment, as lenders are being forced to improve their services, or risk a financial penalty. Last year, high-profile lenders Cash Converters was the subject of a class action lawsuit resulting in a $23 million settlement, after allegedly charging exorbitant interest rates to 36,000 customers.

In a separate case, the Australian Securities and Investments Commission (ASIC) suspended the licence of PAID International Ltd until April 2016. The company had a history of charging customers excessive fees and was ordered to repay $1 million back to 20,000 customers in 2014.

While poor quality lenders are being forced to improve or exit the industry, responsible payday lenders are already steering clear of low-income clients, instead marketing towards young, tech-savvy professionals. The appeal to this customer segment is fast access to cash available via bank transfer the same day, without the need for a credit card or lengthy contracts.

Club Money is one such lender that aims to help its clients through quality and professional financial services. “We do not believe in making your situation worse by adding unnecessary fees,” says Club Money. “We will not lend irresponsibly which may put you in financial hardship.”

According to Club Money, payday loan shoppers should look out for these features when selecting their payday lender:

  • All fees are clearly labelled and are not higher than the maximum allowable amount (20% establishment fee, plus 4% monthly fee);
  • A set of strong, lending guidelines and requirements;
  • The ability to negotiate payments in cases of financial difficulty;
  • A skilled customer service team available by phone;
  • The ability to waive penalty fees in some instances.

The review panel looking into payday lending is due to give its final recommendations to the government in February.

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