Payday loans

• What are payday loans?

  Payday loans are high-cost, short-term loans. These loans are often targeted at disadvantaged consumers.

  The NCCP Act distinguishes between four types of loans:

  • short-term credit contracts;

  • small amount credit contracts;

  • medium amount credit contracts;

  • all other loans.

  This section examines the first three type of loans.

• Short-term credit contracts

  Since 1 March 2013, ‘short-term credit contracts’ have been prohibited under section 133CA of the NCCP Act. A short-term credit contract is defined as having a credit limit of $2000 or less and a term of 15 days or less (NCCP Act s 5(1)). This definition does not extend to loans offered by authorised deposit-taking institutions (e.g. banks and credit unions) or to ‘continuing credit contracts’ (e.g. a credit card contract; see also NCC s 204).

  In September 2019, the financial services regulator, ASIC, exercised its product intervention power to ban a model of short-term lending used by Cigno Pty Ltd, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd, and BHF Solutions Pty Ltd (Cigno). Cigno’s subsequent appeals were dismissed by the Federal Court in 2020 and the Full Federal Court in 2021.

  ASIC has also been successful in proceedings against Cigno and BHF Solutions for engaging in unlicensed credit activities (Australian Securities and Investments Commission v BHF Solutions Pty Ltd (No 2) [2023] FCA 787); and against Cigno and BSF Solutions (Australian Securities and Investments Commission v BSF Solutions Pty Ltd (Liability) [2024] FCA 553.

• Small amount credit contracts

  A small amount credit contract (‘SACC’) is defined under the NCCP Act (s 5) as a contract where:

  • the credit limit is $2000 or less;

  • the term is at least 16 days but not longer than one year;

  • the credit provider is not an ‘authorised deposit-taking institution’ and the contract is not a ‘continuing credit contract’; and

  • the consumer’s obligations under the contract are not secured.

  Some key points to note about SACC obligations:

  • You must provide the credit provider with a bank account statement covering at the least the immediately preceding 90 days (NCCP Act s 117(1A)); and

  • If the contract was in place before 12 June 2023, and a consumer is in default, or has had two or more SACCs in the immediately preceding 90 days of the SACC, there is a rebuttable presumption that they will only be able to comply with the SACC with financial hardship (NCCP Act s 123(3A)).

  Since 1 July 2013, section 31A of the NCC has limited the amount of interest, fees and charges that may be imposed by small amount credit contracts to:

  • a. an establishment fee not exceeding 20 per cent of the amount of credit a borrower receives;

  • b. a maximum monthly fee not exceeding four per cent of the borrower’s amount of credit;

  • c. default fees or charges; and

  • d. any government fee, charge or duty payable.

  The lender cannot impose establishment fees for a SACC that is for the purpose of refinancing another SACC (NCC s 31A(1A)).

  If the consumer defaults, the lender cannot charge more than twice the amount of credit they received, plus reasonable enforcement expenses (NCC s 39B).

  Since 12 June 2023, the following additional measures apply:

  • As part of its responsible lending assessment, the lender must document the preliminary assessment and inquiries and verifications made, ascertain whether the consumer is receiving a social security payment and if so, must obtain and consider an income statement and deduction statement from the past 21 days (NCCP Regulations reg 28HB);

  • The required repayment under the SACC must not exceed 10 per cent of the borrower’s available income. The definition of ‘repayment’ also includes any other amounts payable under any other SACC (NCCP Act s 133CC(1); NCCP Regulations reg 28LCA);

  • Lenders cannot accept payment of monthly fees relating to a period after the SACC has been paid out (NCC s 31C).

  Lenders cannot make unsolicited communications to consumers that contain offers to enter or invitations to apply for SACCs (NCCP Act s 133CF(1)).

  Lenders cannot make proscribed referrals, which are defined to be referrals of a person to another person where it is reasonable to believe that as a result of the referral, the person would or might enter into a contract or arrangement for the provision of credit (being credit that the credit laws do not apply to) (NCCP Act s 160G).

• Anti-avoidance mechanism: small amount credit contracts, consumer leases and product intervention orders

  The Financial Sector Reform Act 2022 (Cth) introduced anti-avoidance provisions which commenced on 13 December 2022. The provisions prohibit schemes designed to avoid the operation of the SACC, consumer lease and product intervention order laws. Section 323B of the NCCP Act sets out an inexhaustive list of matters that may indicate an avoidance purpose is present, including where a consumer is provided with credit that is more complex or costly to the consumer than a SACC, or where a consumer is enabled to have the use of goods in a more complex or costly manner than a consumer lease. A presumption of avoidance will operate in relation to a scheme where the scheme is of a kind prescribed by the regulations or as determined by ASIC (NCCP Act s 323C). Contravention of the anti-avoidance provisions may attract civil or criminal penalties, or both.

• Medium amount credit contracts

  A ‘medium amount credit contract’ is similar to a small amount credit contract, save that the credit limit is at least $2001 and not more than $5000, the term of the contract is at least 16 days but not longer than two years, and the consumer’s obligations under the contract can be secured (NCC s 204(1)).

  Since 1 July 2013, a medium amount credit contract cannot have an annual cost rate higher than 48 per cent (NCC s 32A). The method for calculating the annual cost rate is set out in section 32B of the NCC. In addition to this amount, an establishment fee of up to $400 may be charged (NCC s 32B).

• Advice for consumers of payday loans

  Before taking out a payday loan, consumers should speak to a free, community-based financial counsellor about managing their debts or alternative funding options. These may include hardship variations for bills, energy relief grants, emergency assistance, Centrelink advances, and low-interest loan schemes (see Chapter 5.4: Financial counselling services).

  If a consumer has entered into a payday loan, they should consider whether the lender has complied with its obligations (see ‘Unjust contracts’, in this chapter) and decide whether a complaint to a dispute resolution scheme is warranted.

Payday loans

Chapter: 5.8: Mortgages, consumer leases and other finance products

Contributor: Teresa Gray, Lawyer, Consumer Action Law Centre

Current as of: 1 September 2024

Law Handbook Page: 392

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