Pawn brokers bypass rate cap

The pay-day lending industry is preparing, in various ways, for the introduction of the uniform national consumer code that will set a cap of 48 per cent per annum on effective interest rates.

Sham pawn broking is on the rise with the pay-day loan market leader, Cash Converters, said to be championing this route around the consumer code.

Other lenders are turning to "selling" items of high value to loan applicants who then repay the purchase price after they on-sell the item to an associate of the lender.

While the industry tries to work out how to avoid the cap, National Australia Bank issued a statement two weeks ago claiming it had mastered the art of ethical pay-day lending with their partner MoneyFast.

NAB reported that lenders could break even with an interest rate on the original loan amount of around 16 per cent.

"What this [pilot project] demonstrates is that fringe lenders who are charging annual interest rates as high as several hundred percent are preying on consumers who have limited options," said NAB's head of community finance and development, Richard Peters, in a statement.

"Data indications are that the actual breakeven rate of 27.9 per cent (or 15.8 per cent as a percentage of the initial loan amount) is slightly less than forecast and remains well below current industry practice."

Chief executive of Adelaide-based online lender Paydaydirect.com.au, Lucas Bates, is sceptical about those results.

"The market leader is said to be writing in the ballpark of around $50 million worth of loans per year.

"Perhaps at those high volumes you might be able to make it work for 48 per cent, but quite frankly I doubt it.

"These are small loans, typically a few hundred dollars, and often pretty high risk. There are loan set-up costs and usually there isn't much to be gained from legal action against defaulters."

The 48 per cent per annum cap on effective interest rates is inclusive of fees and charges and is currently in effect in NSW, Queensland and the ACT.

In Victoria the 48 per cent cap applies only to interest and does not include fees and charges so is therefore almost pointless in this fee-based segment. The other states have no cap in place.

"Typically borrowers are charged $20 to $30 for each $100 outstanding per pay period," said Bates.

Meawhile, the Victorian Consumer Law Action Centre has started legal action (again) against Amazing Loans, alleging unconscionable fees and interest charges.

"Our client, who relies on benefits from Centrelink but supplements her income with part-time work, applied for a small loan of $2000 and was charged a 'Loan Advance and Administration' fee of over $1600," said Consumer Action policy officer, Sean Carroll.

"This was combined with an interest rate of 17.9 per cent or an amount of $804.02 in interest."

"That means the total amount payable was $4422.08 for a loan of only $2000.00," Mr Carroll said in a statement.

Lucas Bates said the danger of the cap is that lending will go underground.

"Obviously there are cowboys in this industry, who bully desperate consumers.

"But this is an ancient industry that won't just disappear. The danger is that the cowboys go underground and consumers get no protection."