Wednesday, 13 November 2019
Statements by Senators
Household and Personal Debt
I had a meeting recently with John Hooper, the CEO of the NILS Network of Tasmania. NILS, or the No Interest Loans Scheme, is a great initiative which helps low-income people take out small no-interest loans for various reasons, such as for purchasing household essentials, paying out-of-pocket medical expenses or even starting a small business. Mr Hooper told me that before many NILS clients come to the organisation for help they are in significant debt. While it's against NILS's policy to pay existing debts, they can help clients to meet other expenses. Many of those debts that people come to NILS with are payday loans with crippling interest rates. On top of the fees for these small loans, consumers are paying annual interest rates of between 100 and 400 per cent.
Mr Hooper showed me an example of one of these loans. I will call the person with this loan Jane. I actually don't know her real name, because all the personal information on the form was redacted. But Jane bought a refrigerator valued at $1,797. She was given a three-year loan, with payments of $70 a fortnight. This meant the total value of the loan was a whopping $5,460, more than three times the price of the original purchase. This equates to an effective interest rate of about 155 per cent per annum. Had Jane gone through NILS, she would have also received a 50 per cent subsidy under the Tasmanian Energy Efficiency Loan Scheme and she could have purchased a fridge for about one-seventh of the price she finally ended up paying.
The NILS Network of Tasmania is one of 26 members of the Stop the Debt Trap Alliance. The alliance is a coalition of welfare and community services organisations that are calling on the Morrison government to introduce stronger laws to regulate payday loans and consumer leases. Yesterday they released a report, titled The debt trap, which shows the damage that some predatory lending practices are having on vulnerable people. The report found that the value of the payday loan market will reach $1.7 billion this year. I'm really sad to say that my home state of Tasmania is leading the nation in growth in payday loans, with a 15 per cent increase last year. There are close to a million financially distressed and financially stressed households with payday loans, an almost threefold increase since 2005.
While these statistics are shocking enough, the report also includes a number of case studies that demonstrate the human cost of these loans. One story I found particularly tragic was that of Charlie, an Aboriginal woman in her 20s, whose name has also been changed for privacy reasons. I just want to read to you part of the report about Charlie's circumstances. This is directly from the report:
Approximately 5 years ago, when she was under 20-years old, Charlie started a business traineeship earning a little over $450 per week. Around this time, Charlie was also going through a really hard time. Charlie's father had passed away shortly before Charlie had tragically given birth to a baby that was stillborn. Charlie needed money to pay for the cremation services for her baby. Charlie therefore took out a payday loan for a little under $650.
With all of this anguish and stress, however, Charlie became mentally unwell and was no longer able to work, sending Charlie into significant financial difficulty. Charlie's only source of income became the Centrelink pension which she was using to pay rent, groceries and things for her young child. Charlie fell behind on her payday loan repayments.
The payday loan contract was originally for a principal amount of a little under $650. However, Charlie was also charged an up-front establishment fee of a little under $130, ongoing monthly fees and dishonour fees if she didn't have enough money in her bank account to pay the loan. This meant that every time she missed a payment because it was dishonoured, Charlie was charged a dishonour fee of a little under $35. To this day, Charlie has been unable to pay back this payday loan and now owes much more than she originally borrowed.
Charlie experienced money trouble for several years and she turned to other forms of unregulated credit to help her meet general living expenses. These included getting another payday loan and also using buy now pay later services. For the buy now pay later debt, Charlie was only able to make one payment before she fell into arrears and started being contacted by debt collectors.
In addition to her baby and her father, Charlie's mother also passed away in the last couple of years. Charlie was the next of kin for both her father and mother and her main financial priority since their passing was paying for the funerals of her loved ones—
her mother, her father and her baby.
Any spare money that Charlie had was going towards paying for these funerals and then paying off funeral directors.
Charlie was sent to prison in 2019 leaving her with no income at all, no way to pay off her debts and no repayment options to get out of the debt trap.
It's called a debt trap because borrowers often take out further loans when they struggle to meet the basics of living, leading them into a spiral of debt from which they cannot escape.
Three years ago, the government released their response to the small-amount credit contract, or SACC, review. They committed to introducing legislation to crack down on some of these predatory lending practices and to protect vulnerable Australians. In 15 days, it will be exactly three years since the government made that commitment, so where is the legislation? They even released an exposure draft in 2017. To progress the issue, because they're a bit slow with some things on that side, Labor has repeatedly introduced private members' bills into parliament identical to the government's exposure draft. However, the government have stubbornly refused to progress our legislation or to introduce their own. Three years since the government promised action, vulnerable Australians on low incomes are continuing to be exploited by lenders for profit and to fall into the cycle of debt. While hundreds of thousands of Australians are suffering from these crippling loans, the Morrison government's failure to rein in these predatory lending practices is disgraceful. So it's time that those opposite actually started to act on this sort of issue.
I just want to point out that research shows that payday loans are made easily accessible through digital platforms, but often borrowers are not fully aware of the risks, the consequences and the on-costs that go with these loans. A decade ago, only 5.6 per cent of payday loans originated online, but by the end of this year, 2019, that figure is predicted to increase to almost 86 per cent. Aggressive marketing techniques are used, which is part of the reason for the increase in demand. Part of the sell of the advertising is advice on good budgeting, which is quite a misleading message—that payday loans are somehow linked to good financial management.
We've got the Prime Minister and the Treasurer of this country, who finally, after having been taken kicking and screaming to the royal commission, act all tough on the financial institutions and the big banks, but they're letting payday lenders escape legislative reform, and I want to know why. There's no doubt that there is broad consensus that stronger consumer protections are needed and it's time the federal government protected Australians from financial harm and introduced these changes as a matter of urgency to the parliament. It's been over four years, as I said, since the small-amount credit contract review was initiated and three years since the government accepted the recommendation. What is the hold-up? Why is there a hold-up?
Is it because this affects the most vulnerable in our community, those who are economically disadvantaged and excluded from accessing mainstream finances? Or is it because this government just can't get their act together, they just don't care, they're constantly in chaos and they don't care what happens to vulnerable and low-income Australians? This matter needs to be looked at urgently. Payday loans cannot go on so unregulated that people are getting into debt and having to go to jail.