Exploring the role of fringe lenders in the lives of Queenslanders

Exploring the role of fringe lenders in the lives of Queenslanders. Introduction   Low income Australians use a variety of coping strategies to  overcome financial crises, among them high-cost short-term credit  provided by payday lenders. There is a large and growing demand for this consumer credit and a rapidly expanding network of companies willing to  supply it Infosys Technologies Ltd 2008. Recent research indicates that fringe lending has a market size of $800 million and is the fastest  growing part of Australia's financial landscape Infosys  Technologies Ltd 2008. The first payday lender appeared in Australia in 1998 and by 2001, 82 payday lending businesses were offering 12,800  loans per month T. Wilson 2004. Given this expanding supply of payday loans it is clear that this form of lending is becoming a more prominent  dimension of the financial management strategies of low-income  Australians. Concerns have been raised by State and national governments in Australia about the negative impact on consumers of payday lending,  which has led to interest rate caps being introduced in a number of  Australian States Manning & de Jonge 2006. More recently, there has been a national push to standardise regulation of this sector at the  national level Treasury 2008; 2010. Despite these policy initiatives, there is a lack of robust evidence on which to base policy proposals,  particularly evidence about borrowers' perspectives and experiences  of payday loans. This article reports on some research aimed at addressing this situation. The pilot study, undertaken in Queensland in 2008 and 2009 and reported here, has explored the characteristics and  motivations of those who borrow from payday lenders, as well as the  perspectives of lenders on the idea of responsible lending. Current policy and legislative responses to borrower harm are largely regulatory, such as more stringent licensing to encourage  responsible lending, greater contract transparency concerning fees and  charges, and mandatory conflict resolution schemes to ensure sufficient  rights of redress. While important in their own right we contend that these measures, by themselves, will do little to address the demand for  these loan products. Similarly, pressure on policy-makers to ban payday lenders may be well intended, but in the absence of alternatives, the  loss of payday lenders could worsen people's lives. By listening to borrowers, and understanding their pathways to fringe lenders, we can  rethink the problem and consider more well-rounded solutions than those  proposed in the sometimes shrill tone of the regulation versus  non-regulation debate in Australia. Conceptualising payday lending in Australia   In mapping the range of responses to financial need, Burkett and  Drew 2008 depict the financial sector as consisting of four types of  providers. Formal providers tend to be mainstream services such as banks, registered financial institutions and insurance companies, and  superannuation funds. The welfare system provides social security payments, small loans, emergency relief and microfinance No Interest  Loans Schemes NILS. Between these two systems there is also an emerging sector known as social enterprise, which seeks to harness  public, private and community resources to enable the provision of fair  finance alongside profits redistributed to meet social objectives see  Burkett, 2010, for a much more detailed discussion of this important  development. At the other end of the financial sector spectrum are what Burkett and Drew call informal systems such as borrowing from friends  and family, and the sector known as the fringe economy which includes  payday lenders, pawn brokers and cheque cashers. In this paper our focus is on a particular aspect of lending in the fringe economy, called 'payday lending'. Known also as a 'cash advance', 'deferred deposit loan', a  'payday advance', 'payday loan', or, more recently,  in an intentionally neutral, if somewhat wordy, phrase, the  'for-profit small-amount short-term lending market' Treasury  2010, it usually involves a loan of less than $1000, although some  lenders specialise in larger amounts. These loans aim to assist people to get past an immediate cash shortfall King & Parrish 2007. The loan term is usually about two weeks, the loan must be paid off in full  at the end of the term, and fees are charged for the service T. Wilson  2004. If the borrower cannot afford to repay the loan and fee, then they must renew it, paying an additional fee. The financial services sector in Australia is a segmented market. Some credit products are aimed at people on middle and high incomes and others, such as payday loans, are primarily aimed at the working poor  and people on full-time income support payments Howell 2005. In Australia, researchers have argued that mainstream banks have  increasingly discouraged low-income consumers from using their services,  both by raising basic  Find out more on  bad credit loans