Payday loans may be a quick and convenient way of borrowing money, but they are also extremely expensive, and experts are concerned that advertising campaigns are misleading young borrowers.
In particular, payday lender Nimble Money, which advertises widely on television, has been slammed as “irresponsible” by industry experts. They say its TV ads may lure a new generation of borrowers into a cycle of debt from which it is difficult to escape.
If borrowers do not meet the very tight repayment deadlines, they could find themselves paying staggeringly high interest rates of up to 200 per cent per annum. In other words, if you borrowed $500, you could end up paying back $1500.
Gerard Brody, chief executive of the Consumer Action Law Centre, singled out Nimble’s recent advertising campaign saying that it portrayed taking out short-term loans as being “fun, easy and simple”.
“It is clearly designed to appeal to a younger audience that wants to buy now and pay later,” he said.
A Nimble TV advertisement, which will be pulled by the lender after public pressure, showed a man in the shower who has had his hot water turned off, with encouragement to borrow money from Nimble’s mascot to pay the bill. Another encouraged a young woman to pay her large phone bill so that she can continue to take photos on her phone.
“Recent advertising by Nimble shows people taking selfies and using payday lenders to pay their phone bills. We think that that is designed to normalise payday lending among a younger demographic and that is wholly irresponsible,” Mr Brody said.
A last resort, not an easy alternative
The burgeoning $800 million Australian payday loan market with its sky-high interest rates has previously been seen as an avenue of last resort for borrowers who may find themselves knocked back by other institutions or in financial difficulty.
In an attempt to keep lenders in check, in 2013 the federal government capped establishment fees for short-term loans at 20 per cent and allowed providers to charge a maximum monthly fee of four per cent.
Despite this effort to reduce costs, Michelle Hutchison, money expert at loan comparison site finder.com.au, said that fees can still equate to an average annualised interest rate of 292 per cent.
“For a loan of $1000 for 30 days, that would cost $240 – almost a quarter of the borrowed amount,” Ms Hutchison said.
She added that many lenders pass on the maximum amount of fees they are allowed under the cap.
The hidden costs
Nimble is one of these and charges the maximum rates allowed for its loans of 16 to 60 days. In addition it charges a $35 dishonour fee each time a scheduled payment is not made and a daily default fee of $7 to cover administration costs while an account is in arrears.
However, the regulations do cap total debts at 200 per cent of the initial loan to protect consumers.
The Australian Securities and Investments Commission (ASIC) said that it was closely monitoring payday lender advertisements and had taken action on various advertisements to ensure consumers were not being misled.
“Statements about ease of access to payday loans are a particular focus and we engage with payday lenders about individual advertisements,” an ASIC spokesperson said.
Nimble currently accepts applications for short-term loans of between $100 and $1200, with some applications being assessed in less than six minutes. It also has an app making the process easier and familiar to younger borrowers who are used to using their phones or iPads to make transactions.
We provide an important service, says Nimble
Nimble chief executive Sami Malia defended short-term lenders saying they provided an important service to consumers and said that it never lends to people who are fully dependent on Centrelink benefits.
“We’ve helped thousands of people in thousands of ways, with things like buying plane tickets to make it to their kid’s wedding, getting the car fixed or paying a vet bill. And what’s great is in almost all cases these customers have used Nimble, repaid in a few weeks and moved on with their lives,” he said.
Mr Malia also said that Nimble only approves around one in four applicants.
“It’s really important not to confuse an easy process with easy approvals. Is it perfect? No, probably not. But no system is and we are constantly improving,” he said.
However Mr Brody argued that payday loans are designed to keep people in a borrowing cycle and are potentially dangerous for young people who may not have a credit history and may find it hard to be approved by banks for other credit.