payday loansThe number of payday lenders is about to shrink due to new regulations, according to  Paid International (formerly First Stop Money). Is this a good thing for those people on the fringe? We look at what the changes are, how they will impact borrowers and those people who don’t have access to mainstream credit due to bad credit.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repair and

Last year the Australian Government decided to start restricting interest charges to payday lenders through the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 which changed the playing field for payday loans, as well as rules around financial hardship. The Government wanted to “stop loan sharks from exploiting vulnerable Australians,” Financial Services Minister Bill Shorten said in a statement to the media following the Bill’s passing in Parliament.

“The Gillard Government has moved to reduce the financial harm caused by lenders who ruthlessly impose excessive fees and charges simply because vulnerable consumers cannot obtain alternative access to credit,” he added.

The Enhancements Bill introduced a cap for small amount credit contracts where the amount borrowed is $2000 or less, and the term is 1 year or less. For these loans the maximum any lender can charge is an establishment fee of 20 per cent of the amount of credit upfront and 4 per cent for each month of the loan. This provides for maximum charges of $72 on a loan of $300 over 1 month.

As Banking Day reported last week in its story ‘Payday loan market in transition‘, the introduction of interest rate caps is the second piece of major regulation directed at the payday lending industry this year. The other change will be in the area of credit assessment – intending to ensure potential borrowers aren’t over-obligated.

Providers of small-amount credit contracts must review clients’ bank statements for the previous 90 days to verify their income. Loans with terms of less than 16 days are prohibited, unless it is an authorised deposit-taking institution offering a continuing credit contract.

A loan will be presumed to be unsuitable if the applicant is in default under another small-amount credit contract or has been a debtor under two or more small-amount credit contracts within the previous 90 days.

If a borrower receives 50 per cent or more of their gross income from Centrelink, no more than 20 per cent of their income can be allocated to loan repayments.

The changes to payday lending taking place now are predicted to force the industry to “change dramatically over the next few years”.

The chief executive of Paid International, Tim Dean predicts that payday lending will as an industry, consolidate.

“Only a small number of very efficient operations will find the new rules workable,” he told Banking Day.

Paid International has recently changed its name from First Stop Money, which was reportedly part of a re-positioning of the business.

Dean said that over the next few months Paid International would launch a suite of new products aimed at “middle Australia”.

“Our customers are not Centrelink clients,” he said.

In an emergency situation, people who are stuck with bad credit often turn to payday loans. Including those people that aren’t able to obtain a hardship variation for their circumstances, and have a default or other negative listing (or even too many late payment notations as of next year) placed on their credit file.

Capping the interest rate on pay day loans is a fair move, and restriction on access for those over-committed Australians is also probably a good idea. But I see the bigger picture. Some people who are forced into these situations are there because the system has failed them. Not all defaults deserve to be there, but they all have the same outcome for prospective borrowers. They are banned from obtaining mainstream credit.

Where people are getting let down is in copping the mistake in the first place, and also in the correction of the credit reporting mistake. Whilst the powers that be say that there is a legitimate avenue for correcting credit reporting mistakes for the individual, any consumer who has had the pleasure of dealing with a big company for even small issues will attest to the difficulty in getting a straight answer, getting someone who knows what they’re talking about first time, and ultimately correcting the mistake. This is a common complaint of many of our credit repair clients. Most people are told if it’s paid up they can mark it as such but that’s about it.

So whilst I applaud the new laws, they can’t be looked at exclusively. Whether we’ll have a fairer credit system for all Australians remains to be seen following the implementation of amendments to the Privacy Act in March. Whether Australians will get a ‘fair go’ or find themselves in new hot water – is what we’ll be looking at closely over the next couple of years.

If you have been refused mainstream credit and need help with disputing a credit listing you believe is unjust, unfair or just shouldn’t be there, contact a Credit Repair Advisor on 1300 667 218.