Cash Converters: the Best Wolf in Sheep’s Clothing 2016
The potential danger lurking behind payday loans.
Payday lender Cash Converters earned the award for Best Wolf in Sheep’s Clothing at this year’s Shonkys. The Shonky Awards, run by the consumer advocacy group CHOICE, spotlights the brands that mislead consumers through their advertising and products.
Cash Converters was advertising on the financial advice website Common Cents with “handy cost-cutting tips” that directed customers to take a payday loan with them. On their website, CHOICE explained that this advertising was misleading. “Instead of saving a buck, you could be locking in a loan with a crippling interest rate.”
If you require expert legal advice or services on the financial aspects of running your business, get in contact with a commercial lawyer on LawPath.
What is a payday loan?
A payday loan is a small, unsecured, short-term loan. Under the National Consumer Credit Protection Act 2009 it must be under $2 000, and can be repaid within 16 days and one year. The money will usually be repaid by way of a direct debit from your bank account or a deduction from your pay. This deduction is often taken on the day you are paid, where there is enough money in your account to repay the loan and cover other expenses.
By law, credit providers must lend money responsibly. If, for example, an individual usually spends all their money each pay and cannot cover their other expenses, a lender is less likely to give them a quick loan. The Australian Securities and Investment Commission (ASIC) is the body that regulates the responsible lending of credit to protect consumers who enter into credit contracts.
Why payday lending should be a cause of concern
Payday lenders have the capacity to charge excessively high interest rates to financially vulnerable people, for example pensioners and gambling addicts. Cash Converters charges a 20% establishment fee upon taking out a loan with the lender. From then on, a 4% monthly fee is charged for the life of the loan. CHOICE calculated that, based on these fees, a loan of $2 000 could balloon into a payment of $3 360 over a 12-month period. This is equivalent to an interest rate of 68%.
For Fiona Guthrie, chief executive of Financial Counselling Australia, Cash Converters’ marketing and poor financial advice on the Common Cents website amounted to deception. By advising consumers to get a payday loan, the lender was in fact directing people into “a debt trap, a high-cost, short-term loan marketed to people with low fixed incomes.”
Before entering into a payday loan, it is important for consumers to be aware of their rights and obligations. While such a loan may be a good way to relieve financial stress in the short-term, it can lead to higher fees and greater financial problems in the long run.
If you are setting up or running a business, you should contact a commercial lawyer on LawPath. A commercial lawyer can provide expert financial legal advice and services to safeguard your business from any legal situation that may arise.
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Sydney is a Paralegal at Lawpath working in our content team, which works to provide free legal guides to enhance public access to legal resources. With a keen interest in Tort and IP Law, her research focuses on small businesses, and how they can better navigate complex legal procedures.