New limits for payday loans and consumer leases

The federal government is drafting legislation designed to help protect vulnerable Australians from being stung by payday loans, consumer leases, and similar small credit products.

The legislation is set to affect consumer leases, such as renting appliances, furniture or electronics, as well as small amount credit contracts (SACC) such as payday loans. A 2016 review of laws relating to these high-cost products found that they can potentially lead to very poor consumer outcomes, including interest rates up to 884% and inescapable debt.

Under the new laws, Australians won’t be able to enter into contracts where their rental or payday loan repayments would exceed 10% of their net income – similar to the restriction that currently applies only to Australians receiving 50% of their income from Centrelink, where their short-term loan repayments can’t exceed 20% of their gross income.

Minister for Small Business, Michael McCormack, said these reforms will increase financial inclusion and reduce the likelihood of vulnerable consumers defaulting on repayments and encountering difficulties meeting their basic needs.

“The reforms balance access to emergency finance and household goods with appropriate consumer protection.”

“These reforms will protect vulnerable consumers while ensuring the sustainability of the industry.”

Other proposed legislation reforms include:

• Imposing a cap on the total payments that can be made under a consumer lease;
• Requiring SACCs to have equal repayments and equal payment intervals;
• Removing the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;
• Preventing SACC providers and credit assistance providers from making unsolicited invitations to apply for credit and unsolicited credit offers to current or former SACC customers;
• Preventing lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;
• Introducing broad anti-avoidance protections to prevent SACC and consumer lease providers from circumventing the rules and protections contained in the Credit Act; and
• Strengthening penalties to increase incentives for SACC providers and lessors to comply with the law.

The government is currently seeking consultation on the proposed legislation, with comments and responses to close on 3 November 2017.

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