McKell Institute proposes loan scheme to circumvent payday lending

Community groups say they would support the government rolling out a low-interest small loans scheme so disadvantaged people could avoid payday lending.

It comes from a recommendation in a paper by the McKell Institute that has reported that 20.7 per cent of the nation’s households did not have $500 in savings for emergency use.

The report suggested the federal government should establish a Social Emergency Lending scheme to disperse low-interest loans of up to $500, to be paid back through the tax system.

The interest rate would be about 3 per cent annually, as opposed to the up to 50 per cent applied to payday loans.

The scheme, if implemented, would be open to anyone who earned less than $100,000 a year.

The report said there had been a twenty-fold increase in demand for payday loans.

This has coincided with an almost 10 per cent lift in housing stress over the same period, capturing 31.8 per cent of Australian households.

People can currently access advanced Centrelink payments once a year and purchase goods from the No Interest Loan Scheme (NILS), run in conjunction with the federal government and National Australia Bank.

NILS state co-ordinator Rick Tipping said that the Tasmanian office had trouble keeping up with demand.

He said 2250 loans were made last year, compared to 750 loans in 2010 and 1600 loans in 2014.

Mr Tipping said up to 60 applications were received each week for loans of up to $1200 to help purchase essential household items and pay for services.

“If we had enough operational capacity to respond more quickly, we could easily be delivering 4000 to 5000 loans a year,” he said.

Brad Watson, from the Salvation Army’s state branch, said that federal and state legislation limited most interest rates to payday lenders to 48 per cent. 

But he said many lenders would add other fees and charges and were free to impose significant financial penalties for missed payments, particularly on 16-day loans.

“These loans exploit the marginalised and most desperate with the promise of quick cash, without considering the capacity to repay or the ramifications on family dynamics,” Major Watson said.

“Where financial pressures already exists, for example in families with fixed and low incomes, the payday lenders add to that stress, without resolving the actual issues that have brought about their circumstances.”

Mr Tipping said there was legislation before Federal Parliament to place stricter controls on payday lenders and urged the government to urgently bring it forward for debate.