Need a loan? Research reveals social media users should be wary of payday lenders using digital platforms to peddle their wares to the vulnerable.
If you have ever needed money in a hurry it may have been tempting to apply for a small loan to tide you over until your next pay packet.
But research from Dr Vivien Chen at Monash Business School’s Department of Business Law and Taxation shows the rise of digital platforms has significantly increased consumer access to payday loans.
In Australia, online payday lenders often promise money in your bank account within an hour of approval. Such loans are marketed as ‘quick, convenient cash’ while the high cost of these loans, risks and consequences are often inconspicuous.
Payday loans, or small amount credit contracts, are offered to consumers for amounts of up to $2,000, with the term of the contract between 16 days and 12 months. The credit provider is not an Authorised Deposit-taking Institution (that is, a bank).
“Digital platforms make payday loans very accessible, almost too accessible – but often, borrowers do not fully understand the costs, risks and consequences of these loans,” Dr Chen says.
“Online advertising is blending the ‘sell’ with advice on good budgeting, giving consumers a confusing message, that payday loans form part of good financial management.”
These practices raise significant issues of misleading and unconscionable conduct, underscoring the need for regulatory enforcement.
“Reforms are also needed to address gaps in the regulatory framework posed by emerging challenges from the increasing digitalisation of payday lending,” she says.
Trust me, I’m on social media
The research shows that many payday lenders set up blogs offering readers finance tips. While this seems harmless, these articles can include strategies for managing life well on a budget, sometimes citing experts. Finance tips are blended with recommendations of payday loans.
“On Facebook, for example, payday lenders have many followers and fun social media profiles. Their posts include finance tips, cute pictures and engage in socially responsible activities, such as blood donations or environmental responsibility, yet among these posts, they promote their loans,” she says.
While ASIC warns against this practice, it continues unabated and without any real penalties for lenders who engage in this kind of activity.
Facebook and other forms of social media are subject to very little regulation. And social media is where people are often the most vulnerable.
“It is likely that some consumers are more emotionally susceptible to payday lenders’ advertising when they are viewing their friends’ social media posts, which might include images of recent travel, family gatherings or personal achievements,” she says.
“At times like this, the offer of a payday loan to fund a holiday might seem very attractive – particularly when the lender appears to be helpful, friendly and responsible.”
The recent Senate inquiry into credit and financial services targeted at Australians at risk of financial hardship highlights the problems faced by households with limited access to mainstream finance in Australia.
“The image of payday lenders as ‘trusted friends when you’re in need’ is at odds with observations of the recent Senate inquiry of predatory conduct towards vulnerable consumers. The findings of this study resonate with the latter,” Dr Chen says.
The inquiry’s final report, Credit and Financial Products Targeted at Australians at Risk of Financial Hardship, says that aggressive marketing channels consumers towards high-cost payday loans instead of ‘more suitable alternatives such as financial counselling or low-interest loan schemes’.
It finds that ‘these products appear not only to have been targeted at Australians in financial hardship – they seem to have been designed to take advantage of them’.
The Senate inquiry cited evidence of “widespread non-compliance” and an industry that is keen on exploiting loopholes in the legislation.
Currently, payday lenders are required to provide risk warnings on their websites. However, the research reveals that the warnings are often placed in inconspicuous parts of the websites or the impact of the warnings is otherwise reduced through layout and the use of pictures.
“Warning hyperlinks are obscure, typically located in the midst of other links to miscellaneous information at the bottom of the homepage. As people scroll to the bottom of the homepage, they are presented with significantly more eye-catching, visually appealing advertising before the warning hyperlink becomes visible,” she says.
More effective financial education
The risks associated with payday loans could be more effectively communicated to young adults.
“Millennials are often thought to be visual and experiential learners. The use of videos to explain the risks visually – how debt spirals happen, the consequences such as difficulty borrowing money to buy a house if they have a poor credit rating, and hearing borrowers recount their experiences – may be more effective than the written warnings that are currently required,” she says.
Statistics from the Australian Financial Security Authority, Australia’s insolvency regulator, indicate that the highest users of debt agreements (a form of personal insolvency) are people between the ages of 18 and 29 years.
“Excessive use of credit is the most common cause cited for their insolvency. Other research also indicates that young Australians lack financial knowledge, suggesting a need for more financial education,” she says.
Payday loans are often used by borrowers under financial stress. For borrowers who owe debts to utility providers, another option is to negotiate a financial hardship variation.
Utility providers are legally obliged to consider making flexible arrangements for consumers in financial hardship. Raising consumers’ awareness of this option, and improving access to supports such as free financial counselling, could reduce reliance on expensive payday loans.
Dr Chen undertook this research in her role as an Honorary Research Fellow for the Harmful Financial Products Project. This project is funded by the Australian Government through the Australian Research Council Linkage Grant LP160100082.