Originally published as ‘Life changing loans for those on struggle street’, in the Daily Telegraph, December 30, 2023.
Ed Cavanough & Rosalind Dixon
When many kids woke up this Christmas to a stocking full of presents, it wasn’t just Santa they had to thank.
For many Australian parents, last-resort payday lending will have played just as important a role.
Payday lending has been quietly booming since the GFC and Christmas time is primetime.
But unlike Santa, payday lenders demand a lot more than biscuits and a glass of milk for the reindeers in return for their offering.
Explicitly or not, payday lenders offer desperate Australians a lifeline, but for a very high interest rate – in ways that just add to the cost-of-living pressures facing families.
Reserve Bank Governor Michelle Bullock might claim that Australians are doing okay right now. For many, that is true.
But the latest analysis by ‘Finder’ suggests one in three Australians no longer have any savings buffer left at all, making every sore tooth, parking fine, or sick kid a potential economic catastrophe for their household.
If you find yourself in this situation, chances are you may not have a credit card, and your local bank won’t lend you money.
The only realistic way to raise money in a hurry is to get to your local Cash Converters or get online with one of the many quirkily-named lenders that promise to handle your loan more discreetly.
Those of us lucky enough to live on the right side of the poverty line don’t think much about payday lenders.
But the reality is these lenders are well and truly mainstream.
In the 10 years after the GFC, Australia saw a 20-fold increase in demand for payday lenders.
The data isn’t in yet for 2023, but given the crushing cost of living you would be mad to assume anything other than a rapid acceleration of the trend.
What can we do to reverse it? Some of it is about increasing incomes and reducing cost of living pressures, so that people can build up more of a buffer.
But emergencies will always happen, and for many Australians building that buffer seems a long way off.
Therefore, as imperfect as the world of payday lending is, the answer cannot be to simply ban it.
Fortunately, government has a far better choice: provide an alternative.
In 2017, the McKell Institute proposed a simple government emergency savings scheme that would offer another option for struggling Aussies. For anyone earning under $100,000 a year, an unconditional $500 low-interest ‘Social Emergency Loan’ could be distributed, instantly, into their bank accounts through MyGov.
The government, of course, would not need to impose punishing interest because it has so many other means to recover the debt over time.
In this way the government could mimic the advantages of payday lenders: offer a fast and convenient way to access cash in hurry, with few limits on who can receive loans and no restrictions on what they can be used for.
But it could do so in a way that doesn’t perpetuate the cycle of disadvantage.
Cynics may caricature this proposal as just another handout, but they would be wrong.
It would not be free money. Under the McKell proposal, $500 loans would be capped at two per year.
People would still have to weigh up going into debt to pay the bills. It’s just they wouldn’t be crippled by exorbitant interest if their circumstances mean they have to.
Would it be inflationary? Hardly. The limitations on the amount of support on offer mean that users of the scheme would almost exclusively be using it for emergencies, rather than frivolity.
It was a good idea when first proposed and, regrettably, it’s an even better one today.
Some Australians on fixed incomes can access similar loans through Centerlink. But these are bureaucratically complex, and are not available for large cohort of working Australians who can’t make ends meet.
The Albanese Government has battled against the cost of living crisis to date, but more can be done.
This reform would sit comfortably with its ethos of being a sensible, reforming modern Labor government.
It could be cost neutral to the government, as the money would be recouped, while at the same time being life-changing to those who need emergency cash.
Ed Cavanough is CEO of the McKell Institute.
Professor Rosalind Dixon is a Professor of Law at UNSW.