Desperate Australians struggling with the cost of living are being taken advantage of by loan sharks whose small, high-interest loans are pushing them into “extremely dire situations”, the corporate watchdog has warned.
Consumer advocate groups warned the loans – used to pay for bills, rent, school fees, repairs and basic expenses – were increasingly sending people into “debt spirals” that are difficult to escape.
The chair of the Australian Securities and Investment Commission, Joe Longo, recently told a parliamentary inquiry that lenders were targeting people unable to access mainstream credit, which offered lower fees and rates.
“We’re talking about, very regrettably, fellow Australians who are desperate,” Longo said. “Very often these loans are also to pay the rent and that sort of thing.”
Asic’s deputy chair, Sarah Court, said the relatively small loans have led to vulnerable Australians being “forced into what are extremely dire situations”.
“They take out a loan of $300 or $400, and end up paying back $1,500 because of the significant fees and interest rates being charged,” Court told the parliamentary joint committee on corporations and financial services earlier this month.
“They’re the people that are the least likely in the community to be able to afford the kinds of fees and charges.”
Tom Abourizk, a policy officer at the Consumer Action Law Centre, said calls to the national debt helpline had increased by 28% this year. He said complaints about debts to small-lenders had increased by a similar amount.
“It’s been a significant increase and it’s getting towards the highest it’s ever been,” Abourizk said.
He said the loans were being used by people already living from “paycheque to paycheque” and struggling to deal with the rising cost of living.
“Some have committed their kids to private schools, and when those fees continue to go up it can suddenly be very difficult to make ends meet,” Abourizk said.
“The fees on these loans are big for someone who has a good income, let alone someone on a low income. It is rare that people use these products and get out of the problem. These high-costs loans are often the start of a debt spiral.”
In June, the federal government required small lenders to meet stricter conditions when lending less than $2,000. These included a cap on loan repayments equivalent to 10% of the person’s net income.
“Effectively, it made it harder for people to sell these types of loans to people who cannot afford them because there is a cap on how much of your income [you] can commit to them,” Abourizk said.
He said that in recent months, the Consumer Action Law Centre had seen an increase in medium term loans up to $5,000 to sidestep these stricter lending conditions, including amounts of $2,001.
“We have warned the government of a risk that medium amount contracts will become more popular and we are seeing this now – a movement towards loans above $2,000,” Abourizk said. “We’ve definitely seen an increase in market players in that space.”
