When Shharmy Walker’s family cat became seriously ill, the last thing on her mind was how much it would cost to get treatment.
- “Prepaid” apps that pay a portion of wages upfront in exchange for a fixed fee
- Apps do not have the same responsible lending obligations as banks or credit card providers.
- Financial counselors want tighter regulation to keep people out of debt cycles
The shock of a $2,500 veterinary bill prompted Ms. Walker to start using an app that promised to make her money soon.Three years later, she’s still trying to get out.
As Walker browsed social media, she saw an ad for a new type of product called a prepaid or prepaid app.
With a few clicks on my smartphone, I was able to borrow part of my wages and it was paid directly to my bank account.
“Sometimes it was $20, sometimes $50, sometimes $100, sometimes $300.”
“Sometimes I used it for extra shopping I needed. Sometimes I used it for hygiene products.”
When her youngest daughter fell ill and took time off from casual work, Walker was tempted to keep using the app to cover her essentials.
The app charges a fee for each loan — typically around 5% of the amount borrowed. But businesses don’t have the same responsible lending obligations as other loan providers, so they don’t have to help their customers pay off without any hardships.
Walker borrowed about $8,500 over several years using four different apps. She has used one of her apps called MyPayNow over her 50 times. Although she was able to make many repayments, she missed others and her debt collectors tracked her down.
“I would have had huge moments of anxiety, stress, and existential dread,” she said.
“I’m 37 and have a lot of debt that I need to pay off, but I don’t know how to pay it off. I just work and work and work.
“Honestly, I wish I had never used them in the first place.”
The “Wild West” of Lending
Fiona Guthrie, CEO of Financial Counseling Australia, described Walker’s experience as “utterly devastating”. She considers the product potentially dangerous.
“In general, the rising cost of living is a concern, and more and more people think this is the easy way out, but in reality it often makes your financial situation worse. ‘ she said. Guthrie said.
She said she didn’t have to check whether the loan was affordable because she didn’t have to comply with Australian credit laws because she charged a fixed fee instead of interest, unlike other lenders. rice field.
“It’s the wild, wild west,” Guthrie said.
She said that while some providers are operating responsibly, the lack of regulation could allow new rogue lenders to enter the sector.
“Unregulated credit attracts increasingly predatory players, so some will try to do the right thing, some will not. will be designed.”
Another important concern for financial counselors is whether repeat users understand that they may pay the equivalent of very high interest rates.
Guthrie said a 5% fee could effectively be a very high interest rate for someone who borrows regularly.
For example, a user who borrows $100 every two weeks and pays off each loan before taking out the next loan will pay a fee of $5 26 times in a year. This equates to a $130 fee for a $100 upfront payment every two weeks.
“That’s a nominal interest rate of 130% per annum. No other credit provider can charge a spectacular interest rate up to that level.”
Consultant Grant Halverson, who has a background in banking and payments, said business for prepayment providers is booming.
“[I calculated]about $3.2 billion coming forward in 2022, so it’s a sizeable segment and growing very quickly,” he said.
‘Prepaid’ apps aren’t as harmful as ‘predatory’ payday lenders: CEO
These companies have rejected the “payday lending” tag and instead call themselves prepaid or prepaid providers.
One of the biggest is Beforepay, which is listed on the stock exchange. Up to $2,000, you must repay within two months.
CEO Jamie Twiss claims Beforepay offers a far less harmful product than traditional payday lenders and credit cards.
“Payday lending as a category is a horrible predatory commodity and shouldn’t exist,” he said.
“We pay a relatively small amount upfront. On average, $400. It takes us three to four weeks to get through them until the next payment.”
He said the company does not charge compound interest, late fees or penalties and conducts customer checks even though it is not legally required to meet its lending obligations responsibly.
“We look at an item of banking data and calculate about 500 different attributes for each customer,” he said.