ABC’s recent Four Corners expose payday loans has provided disturbing glimpses of a world that many people are unfamiliar with. Sadly, portraying the story as that of sharks preying on the hapless does not take the financial problems faced by people on low or insecure incomes seriously enough, nor how they can be solved.
Why do over a million Australians take, on average, three to four small loans (typically A $ 100-400) each year? Why have they only been doing this since the early 1990s?
Low-income Australians are in good company with their counterparts in the United States, United Kingdom, Canada and New Zealand. All of these countries have thriving payday industries with remarkably similar proportions of people borrowing comparable amounts of money.
In Research 2012 We found that most of the reasons people typically borrow $ 50 to $ 300 for a fortnight were to buy food or basic necessities for their children and pay for cell phones, utilities and rent. Almost eight in ten respondents received a Centrelink payment. Very few people thought the industry should be shut down because they had no other way to get a small loan. Credit cards weren’t a viable option, as a woman with three young boys said:
“If you’ve got a credit card you’re still going to use it, you know. For example, if we run out of money and have to go shopping, if we have $ 100 in my purse, that’s what we’re going to spend. But if we have a credit card, it’s like an infinity bucket.
For many people, credit cards are viewed as far too dangerous a product. Borrowing money from a payday lender makes more sense because it has a fixed price (borrowing $ 100 for less than a month will cost you $ 24) and a fixed repayment term. Rather than viewing payday loan consumers as gullible, brain-damaged, or drug-affected (although a minority is), our research found low-income people to be savvy and savvy budgetists in finding money. ways to make ends meet.
The report’s finding that most people are caught in an expensive cycle of repeated borrowing has led media and consumer advocates to call for more regulation and even shutdown of the industry. A financial advisor interviewed for the study summed up what’s wrong with this argument:
“It’s very easy for a bunch of middle class advocates, financial advisers, whatever, to say this shouldn’t be happening – but walk a mile in the shoes of people who have no other access. . I think our whole premise should be that Centrelink payments are insufficient for people to live with dignity in this community. “
People with lower than average incomes have to resort to small loans for a number of reasons. First, accompanying the deregulation of financial markets in the 1980s, there was a general transfer of risks and costs that accompany disadvantages from the state to households and businesses. As a result, there has been a decline in the social wage – the public provision of health, education and social protection. Second, there has been an increase in inequalities and precarious work. Third, there are no other viable options. The interest free loan program featured in the Four Corners program does not provide cash for day to day living – the main reason people turn to payday lenders.
This is the reason why commercial payday loans have only been around for 25 years. Today, there are more payday storefronts in the United States than Starbucks and McDonalds combined. This new sector is only part of what Gary Rivlin called the poverty industry – which includes appliance rental stores and other consumer leasing deals, low doc used car finance, pawn shops and dollar stores.
that of Susan Soederberg The recent book “Debtfare States and the Poverty Industry” describes how the poverty industry in the United States flourished as social benefits declined, student loans forced themselves into daily life, and Inequalities are intensifying and job insecurity is becoming the new normal.
It is a knee-jerk reaction on the part of the media and consumer advocates to portray small loans simply as a market problem that can be addressed through tighter regulation and lower fees. The short answer is no, it won’t. Being poor is expensive, and the higher risks associated with lending to low-income people mean that any tighter regulation will tear down this now established market and send it underground. Second, ignoring the broader societal issues that push casual workers and low wages to online lenders and welfare recipients to street lenders leaves the status quo unchallenged.
People who turn to payday loans are portrayed in the media as passive, easygoing, and financially illiterate prey. However, like our Caught short report and other studies suggest that a person taking a small loan often makes a very rational choice to manage their credit and debt in small amounts over short periods of time rather than putting themselves at increased risk of being overwhelmed by skyrocketing credit card debt.
Narrowly defining a financial symptom of today’s society – payday loans – as an issue that can be solved by tighter regulation allows the Australian government to get away with it, erasing the real financial hardships of people with low income. income and not come up with any viable strategy to resolve their financial crises.
Those who want to make a difference should devote their energies to supporting campaigns to increase social wages and access to stable and well-paid jobs. Defending the minimum wage and social services fits this bill, as do the popular initiatives to stop Work for the Dole, which has proven to be ineffective to keep people away from welfare. Both offer more viable ways of reducing the huge and growing demand for poverty industry financial products such as payday loans.
Note: The disclosure statement for this article has been updated to include disclosures that were not originally made by the author.