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Overview of Payday Loans in Australia

Discuss about the Money and Capital Market Analysis for Payday Loan.

The assessment mainly evaluates the overall regulations imposed on payday loans and the overall description for the loaning process. The payday loan in the Australia has relevantly increased its operations in the country in coming years. In addition, the problems, implications, case, and solution to the payday loans can be identified from the overall assessment. The difference in products of payday loans could be identified in the assessment, which might help in understanding the loan process used in payback. In addition, the discussion on implications of the problems that a payday lender is faced on daily basis is mainly identified in the overall assessment. 

The payday loans and cash advance lenders are mainly considered a short-term loan that is provided to an individual during the turmoil financial position. The payday loans relevantly allow the borrower to satisfy the need for money during financial crunch (Banks et al., 2015). The Payday lenders or Cash Advance lenders mainly provides loans to the people who are in need for short term credit, which could be paid within the next payroll time. The loan during relevantly not more than 60 days, when the payment needs to be conducted during the next salary payment date, where after deducting the payment and interest the overall salary is paid to the borrower. The process of Payday lenders or Cash Advance lenders could be identified from the following examples.

Let us take an example of James Miller who hire a plumber to fix his new pubbing system, which costed him $350. However, the plumber hired to complete the job is not accepting credit card and James does not have adequate cash in his savings in his account. Nevertheless, in few days’ time the cash will be available to James, whereas the payments need to be conducted immediately within 2 days or the plumber will take him to small claims court. Hence, James could walk down to payday advance store for getting the relevant loan for the expenses. After signing a loan agreement and writing a cheque for the loan amount along with the interest, the payday advance store could provide the loan amount to James. This relevant payment date is mainly at the next payday, where the lender could take all the relevant loaned amount for the borrower’s bank. The associated loan process relevantly allows the individual to accumulate the required level of amount, which can support his/her expenses during a financial crunch.

Different Types of Payday Loans

The second example evaluates the loan process of an individual already taken a loan from Payday lenders or Cash Advance lenders. In addition, the individual already having a loan from Payday lenders or Cash Advance lenders will need to engage in the same process by taking a new loan on the existing loan for paying the Payday lenders. The borrower needs to write a new cheque with the additional principle amount and interest, which needs to be paid on next payday cash. The payday loan can become a continuous process, where an individual could support his or her expenses by paying a short portion of fees for the short-term loan. The person relatively continuous the payday loan in the process which is depicted in the overall example. Payday lenders do not provide installment payments, which relatively reduces the capability to borrow for repaying the loans on small amount without being charged interest. Some of the payday loans considered to have more than 400% of interest due to the continuous lending process.

Payday loans are relatively popular in Australia due to the help it provides to poor and middle-class people during the financial crunch. The short duration where the payday loan relatively provides adequate capital to support small household expenses of individuals actually makes it a popular instrument for taking loans on daily basis. However, the popularity of the payday loan process is considered disastrous, as it lures struggling Australians by providing them with capital while enforcing high interest rates on the borrowings (Ali, McRae & Ramsay, 2015).

However, the major problem of payday loan is the high interest charged by the lender to the borrower, where the actual problem of the payday loan process can be evaluated. The high interest rates charged by payday loan provider is the main root cause of the problem faced by borrower. The high interest rates charged by the payday loan provider relatively forces the borrower to continue with the short-term loan for a long period by giving out interest as high as 400%. For instance, some of the evaluation of payday calculations relatively indicate that a payday loan of $325 can be repaid at $793, which is relatively high due to the interest rates imposed by the payday loan providers. The main solution regarding the problems faced by borrower is to ignore the payday loans, as it has higher interest rates than the short-term services provided by financial banks (Howell, 2016).

Problems with Payday Loans

The overall Legislative changes in payday loans industry is conducted, as more and more Australian are being trapped into the debt program. The Federal government introduced a new legislation in 2013, Consumer Credit Legislation Amendment Act 2012 was proposed. The overall legislation proposed adequate restrictions on payday loans, which is imposed on lending industry for curbing the use of payday loans. The relevant legislative changes imposed by the Australian government on payday loan providers are depicted as follows.

  • The loans up to $2,000 is relatively band by the Australian government, which needs to be paid within 15 days or less. This relatively helped the Australian citizens to relatively incur high repayment days on short term loans.
  • The cap on loan fees is also forced by the Australian government where and establishment fee of 20% and monthly fee of 4% on credit amount.
  • The borrowers that default on short amount of loans or not penalized with the amount that exceeds twice the loan amount (org, 2018).
  • Protection for borrowers who receive 50% of their monthly income under social security act 1991
  • The lenders need to provide adequate alternative to the borrowers by providing warning statements and advising the consumer to utilize different financing method. These provisions are relatively conducted by the Australian government to reduce the implications and negative impact of payday loans on the Australian citizens.

There are different types of payday loans which are provided to the Australian citizens in accordance with their financial needs. In addition, the different types of payday loans are online payday loans, bad credit payday loans, and instant payday loans. the three different types of payday loans are relatively provided to the consumers in accordance with their financial requirements. Online payday loans are relatively provided to online consumers who needs adequate capital to support their expenses. However, this process relatively takes high credit rating of provision by an individual. In addition, the 2nd payday loan is bad credit payday loans, which are provided to consumers that have bad credit on the loan repayment (Hunt & Wilson, 2016). This relatively forces the bad credit individual to pay high interest on payday loans as they are not able to acquire loans from Financial Institutions. The payday loans are also provided Instantly to the borrowers who require the capital as and when they have to satisfy their financial expenses. moreover, the different types of payday loans as relatively altering interest rates, as the lender evaluates financial credit condition of the borrower and decides the interest rates. Therefore, the payment of interest is relatively different in accordance to payday loans.

The Payday loan product with instant loan has the highest interest rates, which is imposed on the borrowers, as the short-term liabilities of the individual is satisfied during the process. However, the bad credit rating payday loan is considered to have the highest risk, where the individuals previously defaulted against the loan that was provided to him/her. Due to the measures used by the Australian government the interest rate on payday loans are relatively higher in comparison to other countries, which mainly helps in minimizing demand for short term payday loans by the Australian citizens (Buckland, Robinson & Visano, 2018).

Figure 1: Stating the payment schedule of payday loan

(Source: Jeffs, 2018)

The figure relatively provides the overall schedule of the payday loan, interest and the total finance charges are calculated. from this valuation the overall payment and interest charged by the payday loan provider for a particular day can be seen. Example relative Lee States capital payday loan procedure and interest charged by the payday loan provider to the borrower. 

The Impact of Payday Loans on Borrowers

Payday loans a relatively considered a problematic interview for the borrowers, as it has a tempting feature, where the individual can take the cash at no credit score. However, this quick capital that is provided by payday lenders come with a hefty price, where high interest rates are charged for small days of loan. This relatively forces the individual borrowers to pay a higher interest on the loans as no other financial institution would provide them with the amount that is needed doing their financial crunch. Payday lending process is relatively easy, as any individual who walks into the payday loan providing shop could get alone if they are able to write a check for the loan amount plus the fees.  Moreover, the payday loan providers do not evaluate their creditworthiness before providing money, as they are able to sue the individual in court if the cheque bounces and the payment is not made. Moreover, payday loans are considered a debt cycle, where the individual is not able to come out from the loan process, as higher interest rates are charged on every payday loans (Kelly, 2015).

On the personal front ignoring payday loan process is essential, as for a short duration of time an individual is paying a higher interest rate on the particular loan. this would eventually increase the burden and hamper the overall creditworthiness and cash position of the borrower. Ignoring the payday loan is much effective for a borrower, as payments conducted after receiving the paycheck would eventually reduce the cash outflow from a borrow. Hence, on a personal front Ignoring the payday loan process is relatively essential for every individual, as it might increase the cash outflow of the borrower. Continuous threat of rising interest due to the non-availability of funds for repaying would eventually haunt the individual and increase the rate of cash flows from a particular loan. In this context, Jeffs (2018) stated that individuals taking payday loans are not able to repay the loan amount on time and an extension on the loans are conducted, which relative Lee increases the interest payments and loan amount by 400%. On some instances, same individuals take more than 4 to 5 loans to repay a particular loan taken during financial crunch.

Conclusion:

From the overall evaluation payday loans are relatively considered debt cycle, which would eventually force the borrower to pay high repayment and interest than anticipated while taking the loan. This relatively indicates the cruelty, which is conducted by the payday loan providers to their borrowers, as they have to provide higher interest and repayment amount due to the high interest rate. The legislations imposed by the Australian government has a relatively reduced the negative impact of payday loans on the Australian citizens. In addition, it also helped in minimizing the defaulters of loans due to high interest rates imposed by the payday loan companies. Therefore, it could be understood that poor and middle-class people needs to avoid payday loans, as it is a trap, which would initiate a debt cycle that will never end due to the continuous shortage of cash. 

Reference and Bibliography:

Ali, J., & Banks, M. (2014). Into the mainstream: The Australian payday loans industry on the move. JASSA, (3), 35.

Ali, P., McRae, C. H., & Ramsay, I. (2015). Payday lending regulation and borrower vulnerability in the United Kingdom and Australia.

Banks, M., Marston, G., Russell, R., & Karger, H. (2015). ‘In a perfect world it would be great if they didn't exist’: How Australians experience payday loans. International Journal of Social Welfare, 24(1), 37-47.

Buckland, J., Robinson, C., & Visano, B. S. (Eds.). (2018). Payday Lending in Canada in a Global Context: A Mature Industry with Chronic Challenges. Springer.

Chaaya, M., & Anderson, P. (2017). Regulatory reform agenda: What does it mean for the banks?. Governance Directions, 69(4), 228.

Debt.org. (2018). Debt.org. Retrieved 26 April 2018, from https://www.debt.org/credit/payday-lenders/

Farley, M. B. (2016). Caught on the Wrong Side of the Line: An Examination of the Relationship between the Payday Loan Industry and American Indian Tribal Sovereignty. J. Corp. L., 42, 481.

Howell, N. J. (2016). Making payday loans safer: the Australian approach to regulating small and medium sized loans. In Credit, Consumers and the Law (pp. 129-155). Routledge.

Howell, N. J. (2016). Small amount credit contracts and payday loans: The complementarity of price regulation and responsible lending regulation. Alternative Law Journal, 41(3), 174-178.

Hunt, K. H. M., & Wilson, T. (2016). The Impact of Borrower Characteristics On the Effectiveness of Small Loan Regulation.

Jeffs, A. (2018). The history of payday lending in Australia | finder.com.au. finder.com.au. Retrieved 26 April 2018, from https://www.finder.com.au/history-of-payday-loans

Kelly, A. (2015). Consumer credit law: Payday lending practices: Why unethical loans are harming the vulnerable. LSJ: Law Society of NSW Journal, (12), 82.

Marston, G., & Shevellar, L. (2014). In the shadow of the welfare state: the role of payday lending in poverty survival in Australia. Journal of Social Policy, 43(1), 155-172.

Paterson, J. M., & Brody, G. (2015). “Safety Net” Consumer Protection: Using Prohibitions on Unfair and Unconscionable Conduct to Respond to Predatory Business Models. Journal of consumer policy, 38(3), 331-355.

Rowlingson, K., Appleyard, L., & Gardner, J. (2016). Payday lending: regulation is a forward step, but there are lessons to learn from this industry. British Politics and Policy at LSE.

Wilson, T. (2016). The Responsible Lending Response. In International Responses to Issues of Credit and Over-indebtedness in the Wake of Crisis (pp. 121-144). Routledge.

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