Will the Fed abolish interest-rate caps on pay day lenders?
Many feel that scrapping interest rate caps will leave low-income earners vulnerable to rip-off interest rates.State-based rate caps that stop lenders charging exorbitant interest are likely to disappear once the Federal Government takes over regulation of consumer credit, raising concern about the impact on low-income borrowers who have no choice but to use high-cost "fringe" lenders.
The Federal Government is expected to rely on its "responsible lending" laws, due to take effect from November, rather than maintaining the interest-rate caps that apply in NSW, the ACT, Victoria and Queensland.
There seems to be a presumption that a Labor Government will dismiss the important protective measure of capped interest rates out of hand.
In my opinion is this pure speculation, and I am confident that the social justice values of the Labor party will shine through, and any changes required to the Legislation will be made to protect the most venerable in our society short term credit to struggling low income earners is a high risk business, where both the capital and the interest are at risk.
So it is expected that these loans charge a higher interest rate.On the other hand, even a high interest rate is not enough to offset the risk, and fees and charges, that increase on defaults, should be part of the compensation mix.
These loans are usually small, and are usually paid within a month or so, a higher interest rate is not a burden. They become a burden when the interest rate balloons and the borrower cannot repay, said Mr Mortgage. "So yes, there needs to be room for hardship rules to govern the conduct of payday lenders."
Teresa Wilson, who chairs the Australian Microfinance Network. says "The Government has indicated that it's not keen on interest-rate capping, apparently because here will be a “responsible-lending requirement” attached to credit contracts and I think it's relying on that to minimise exploitative lending practices.
Teresa feels that the Government needs to look closer at using an interest rate cap as part of the responsible lending law.
Mr Mortgage says “that as long as the borrower has free access to the Courts to claim financial hardship, then the Government may be enough to protect low income earners and pensioners. On the other-hand, if course actions were to become wide spread these actions could clog the courts and legal system and only the lawyers would benefit.”
“Also, Teresa has not mentioned pawnbrokers, and these seem to be able to lend at higher rates and not be affected by credit laws” To me this is a big loophole that needs to be addressed.
"Low-income earners, unable to access credit from mainstream lenders because of "rigid" lending criteria, have little option but to pay high rates if they need a short-term loan to cover a large energy bill or to replace a broken-down fridge, " Teresa Wilson says.
The situation is no better or worse as mainstream lenders tighten their criteria in the wake of the credit crunch, she says. That's because credit assessments are based purely on income rather than looking more broadly at ways to help them. "It has been demonstrated that people on low incomes can repay loans as long as the loan product is structured so as not to set them up for failure," Wilson says, adding that it requires reasonable interest rates, reasonable repayment schedules and some flexibility in the product."
"It's about looking at capacity to pay in a real sense and structuring the product so it's affordable," she says.
I think that we all need to realise that predatory lending practices that caught so many home buyers in the US , have led to the failure and closure or merger of many banks and mortgage lenders in the US.
In Australia we are better than that. Any contract has to face a fairness test. On that point alone any predatory loan would fail, be unlawful and as such unenforceable at law. The Problem is that most people are unaware of this.” Says Mr Mortgage.
A National Australia Bank project that is testing what the break-even rate for small loans really is say its 28%, about the rate of so called “interest free loans”.
One thing that can be agreed is that yes, we need small loan and cash flow lenders and payday lenders, because they serve a necessary function. What we don’t need fringe lenders who are charging annual interest rates up to 240 percent and up to 480 percent are preying on people who can least afford to repay. We hope that Ms Wilson's concerns are addressed for the sake of borrowers of small loans.
