Blog

From payday loans to funeral insurance, some financial products come with a warning – and the warning reads: BEWARE, writes Christine Long.

When money is tight it makes you more vulnerable and more likely to jump at anything that seems to offer some relief. That can make you a target for providers of some of the most hazardous financial products and services around. Like pay-day lenders.

NAB research shows almost one in five Australians (18.7 per cent) rarely or never have any money left at the end of a pay cycle. For those trying to survive on a low income these short-term loans can seem like an ideal fix, if bills need to be paid, something breaks down or if there is not enough to eat.

Adam Mooney, chief executive of Good Shepherd Microfinance, says high-cost lenders target people on low incomes with “promises of fast cash and online same-day approval”. However, with interest rates as high as 240 per cent, many borrowers end up in a cycle of repeat loans and mounting debts, according to Katherine Lane, who is principal solicitor with the Financial Rights Legal Centre.

“It’s very common for people to have more than one payday loan,” Lane says. “I’ve had whole families who have all got payday loans. They are all on Centrelink and they are all poor and they are just trapped in a debt cycle.”

A report released by the Australian Securities and Investments Commission (ASIC) last month estimated that $400 million in payday loans were written last year, a rise of 125 per cent since 2008. Two-thirds of the files it reviewed showed that people were borrowing when they already had a loan; when they were in default for a loan or when they had loans during the last 90 days.

Nicola Howell, who researches consumer insolvency at the Queensland University of Technology, says the growth in payday lending is in part the result of a lack of alternatives. “Banks for the most part won’t lend small amounts of money,” she says. “Credit cards may not be available or people may have maxed out their credit cards.”

She suggests government could be doing more to support no-interest loan schemes and to ensure the Centrelink advance system works for people who need it.

Payday loans are not the only product or service that can lead you deeper into financial difficulty if you are already struggling. Here are five others to be wary of and some alternatives.

RENT-TO-BUY ARRANGEMENTS

Can’t afford to buy a fridge or a TV outright? Companies such as Radio Rentals and Rent the Roo market rent-to-buy arrangements. They also promise peace of mind through “responsible” policies that assess their customers’ credit history and, in the case of Radio Rentals, aim to “never over-commit you – it’s not in our interest, or yours”. But the high cost of renting – interest rates can be 40 to 90 per cent – is often hidden by some of the less scrupulous providers.

Mooney says: “Goods rental companies usually advertise a weekly repayment rate which may seem affordable, but what they don’t tell you is that by the time the contract ends you’ll have paid about 300 per cent more than someone who bought the product outright.”

Over three years, the customer will pay about $1800 for a $650 fridge. Contracts often include the option to buy the item for $1 after three years. However, the customer needs to contact the rent-to-buy company and pay the $1 separately, something that is easily overlooked, says Mooney.

“The other reason that $1 buy option is there is purely to exploit a loophole in the National Credit Act,” he says, adding that the contracts are deliberately designed to sidestep legislation governing small amount loans (loans of $2000 or less). Under that legislation, the provider has to disclose to the client upfront the value of the item and the total finance cost. “There’s also a pricing cap so the financial service provider can only charge 20 per cent upfront plus 4 per cent of the original amount per month.”

Sydneysider Norma Wannell has experienced the high cost of these arrangements first-hand. She worked in the community sector until 2009, when an accident forced her into early retirement and on to a disability pension. In November 2013 she signed a rent-to-buy contract “on the spur of the moment” to get a new vacuum cleaner. Recently she checked how much she needed to pay to buy the Dyson cleaner. The answer: $991.

“My reaction was: You’re kidding,” she says. “I’d already paid about $1500 on it.” The alternative was she could continue making the $39 fortnightly payments for another 18 months and then buy it for a $1. By that time she would have paid about $3200.

“I can’t just give the items back because I’ve paid too much now and I’d be liable to pay the contract out anyway,” she says.

The alternative: For Centrelink recipients there is a no-interest loan scheme (NILS) for essential items (see box). Wannell has used one in the past to buy a new fridge.

FUNERAL INSURANCE

Consumer advocates warn funeral insurance is rarely good value. Gerard Brody, chief executive of the Consumer Action Law Centre, says payout figures are often low.

“It’s not like a savings account or an old life insurance policy that will pay out what you contribute to it,” Brody says.

People may contribute $15,000 to $20,000 to a policy over the years, but their estate will only receive a payout of $5000 to $6000. Policies can also have stepped premiums, which means they get significantly higher as the policy-holder ages.

“By the time you’re 70 or 80 years old it’s actually a significant proportion of your income especially if you’ve gone on to the pension,” says Brody. If people can’t afford to keep up the premiums they lose everything they’ve contributed.

The alternative: Lane says: “The vast majority of people have access to some sort of funeral cost cover through their superannuation death benefits.”

Another solution: Save up or prepay for a funeral.

PART IX DEBT AGREEMENTS

If you have mounting or multiple debts, these agreements can seem to offer a way out. Debt agreement activity reached the highest annual figure – 10,705 – on record in a financial year in 2013-14, according to the Australian Financial Security Authority.

People often mistakenly think it’s some form of debt consolidation, says Lane.

“It’s not. It’s a form of bankruptcy,” she says. “It blemishes your credit report quite seriously and it’s an act of bankruptcy so people can use it later to make you bankrupt if they want.”

Brody says: “Part IX debt agreements are probably suitable for someone who wants to avoid bankruptcy because they own property, probably the family home.

“Our concern is that the majority of people who end up in debt agreements don’t even have property to protect.”

The alternative: Seek the advice of a financial counsellor. Often, says Lane, “another option like making financial hardship arrangements [with creditors] is much better and has less repercussions.”

CREDIT REPAIR SERVICES

It’s tempting to turn to a credit repair service if previous defaults are preventing you from getting a loan or credit card. However, Lane says such services come with a high price-tag – up to $1000 per default – and may not actually achieve the desired outcome.

Brody explains: “If the defaults listed on their credit report are accurate then a credit repairer can’t actually remove those.” Or, he says, they may only be able to remove one of several default listings. “[The consumer’s] access to finance isn’t improved at all but the credit repairer says it’s done its job according to the contract that they’ve entered into with the consumer.” ‘

The alternative: You can obtain a free copy of your credit file to check for default listings. Creditors must follow a set procedure before they can list a default. If you believe there is an error on your credit file contact the relevant Ombudsman and make a complaint.

“So if it was your energy company that made an incorrect listing you could make a complaint to the Energy Ombudsman,” says Brody. “Those services are free of charge and very simple.” ‘

PERSONAL BUDGETING SERVICES

Paying for a service to handle your finances may seem like a positive step if money is causing you angst. Not so, says Lane. “If you’re in financial difficulty the last thing you need to do is add another creditor to your pile.”

Lane says some services tell customers to stop paying their creditors, pay them and they will do deals with their creditors. They also make mistakes such as getting people to pay statute-barred debts, those that are too old for a debt collector or creditor to pursue.

“If you’re in financial difficulty in any way, all debts are not created equal and you need advice on who to pay and who not to pay and who to make arrangements with and these [services] simply do not do that.”

The alternative: Financial counsellors can help you make financial hardship arrangements with creditors. Free budgeting tools are available on ASIC’s Moneysmart website or the Consumer Action Law Centre’s MoneyHelp. Small loans for essentials

Good Shepherd Microfinance helps Centrelink recipients take out NILS loans of $300 to $1200 to buy essential items such as a fridge, washing machine or television. It also has StepUp, a low-interest (5.99 per cent) loan scheme for loans of $800 to $3000.

The loans can be accessed through 660 community organisations throughout Australia, with Carers Victoria the latest organisation to act as a facilitator. NILS recipients have a year to pay off the loan in equal instalments and three years for a StepUp loan.

Good Shepherd’s Adam Mooney, says NILS borrowers have to meet three criteria: they must have stable housing (at least three to six months in one place); be able to afford the loan and have the intention to repay it.

As part of the assessment process the organisation offers budgeting help. It will lend to the “credit impaired” and help them negotiate hardship arrangements to repay outstanding debts. ACTION PLAN

  • Find a free, independent financial counsellor (Call MoneyHelp on 1800 007 007 1800 007 007 FREE).
  • Consider all your options including hardship arrangements
  • Use free budgeting tools and services
  • Get a free copy of your credit file


Posted by Christine Long – The Age on 22nd April, 2015