Short term loans
Short term or pay day loans, available from stores such as Cash Converters, The Cash Store and Money 3, can become a debt trap if you are in financial difficulty. These loans have exorbitant fees and interest rates which can in effect amount to several hundred per cent a year. If you cannot make your payments on time, the interest and other charges will make it very difficult for you to get out of debt.
Pay day lenders usually require you to pay by direct debit, which means that if you are in financial difficulty, you may not have enough money left for essentials such as food or rent.
For low income earners these loans often push them further into debt.
Since 1 July 2010, lenders have not been allowed to take security for the loan over your household goods, nor can they attempt to seize these items if you don’t pay. However, if you’ve entered into a loan like this and your lender is demanding payment or charging excessive interest, you should complain to the relevant EDR scheme.
Find out more about debt collection procedures.
- Do you have legal protection for your short term loan?
- Must you repay your short term loan?
- No or low interest short term loans
Do you have legal protection for your short term loan?
Most short term lenders are required to comply with consumer credit legislation and must consider flexible repayment arrangements (a hardship variation).The strongest legal protection short term borrowers are likely to have is the responsible lending laws, which make it an offence for a lender to provide a loan for household or personal purposes which is unsuitable for the consumer. It will be unsuitable if it does not meet your requirements and objectives or you could not repay the loan without experiencing substantial hardship.
Many short term loans involve people already in financial difficulty or those in receipt of Centrelink income. If you fit into either of these categories it may be comparatively easy to argue that you should not have been given the loan in the first place and that your lender may have committed an offence in lending to you.
Lenders must check that a borrower can repay any loan without substantial hardship. Those who offer short term loans must also consider a borrower’s bank statements for the 90 days before the loan. A lender will be presumed to have breached the law if the borrower has a short term loan on which they have defaulted or has been granted two or more loans in the last 90 days.
If more than half of your income is from Centrelink, your loan repayments cannot be more than 20% of your gross income.
Should your lender not agree to waive all charges and interest, you should lodge a complaint with the relevant ombudsman scheme.
Must you repay your short term loan?
If you have no assets and your only income is from Centrelink, creditors cannot enforce repayment. Whatever they or their debt collectors say, your income is protected from any court action.
No or low interest short term loans
Step UP loan
This scheme provides loans between $800 and $3,000 from NAB (with Good Shepherd and other community agencies). Generally borrowers hold a concession card and are in stable accommodation (for 6 months residence). The interest rate is 3.99% a year (in September 2013) with no other fees.
No Interest Loan Scheme (NILS)
This scheme is run by Good Shepherd Youth and Family Service through community groups such as neighbourhood centres or charities. A typical loan is between $800 and $1,200 for white goods or any other essential household item. The loan is repaid over 12 to 18 months and the money loaned out again.
See link to Good Shepherd above.