Which country leaves you worse off when it comes to short-term loans?
In both the United States and Australia, payday lenders have gained a fair amount of negative attention. Referred to as costly, predatory and an economic drain on the societies in which they operate, it’s interesting to compare the state of payday loans in both the US and Australia to see how they compete.
How they are regulated
Loans of up to $2,000 are regulated at a federal level. There are regulations on loan amounts, repayment terms and the number of loans someone can apply for at one time, among other things.
Payday loans are regulated at a state level. Payday loans are illegal in some states, they have fees, terms and minimum borrowing amounts restricted in others, and are unregulated in other states.
What kind of short-term loans are available?
- Small amount credit contracts (SACCs). Loans of up to $2,000 that are repaid in line with when you get paid. Repayment terms can be anywhere from 16 days to one year.
- Medium amount loans. Loans between $2,001 and $5,000 that have repayment terms between 16 days and two years. While not considered “payday loans,” these loans are still marketed towards bad credit borrowers.
- Larger loans. Loans above $5,001, while also not considered “payday loans” due to them being larger loans with longer terms, also have capped rates.
- Payday loans. Small loans up to $1,000 that are repaid in full on your next payday, usually with a maximum term of one month.
- Installment loans. These are loans for larger amounts — up to $5,000 — that are repaid in fortnightly or monthly installments over a longer term, for example, one year.
- Auto title loans. If you have a car, you can use its title to secure a loan, with the amount you’re approved for depending on the vehicle you own.
How the costs compare
- For a loan of up to $2,000 that is repaid within 16 days to one year, a lender can only charge a 20% establishment fee and a 4% monthly fee.
- For a loan between $2,001 and $5,000 that is repaid within 16 days to two years, fees are limited to a one-off establishment fee of $400 and an annual interest rate of 48%.
- For larger loans above $5,000 or with terms longer than two years, fees and charges can’t be over 48% annually. This includes establishment fees.
- This is all set at a state level and varies greatly. In some states, the costs are heavily regulated, while in others there is little regulation as to how much lenders can charge.
- Annual Percentage Rate (APR): Ohio has the lowest maximum APR lender’s can charge at 28%, while states like Delaware, Idaho, Nevada, Utah and Wisconsin have no set limit. Rate restrictions of around 500% are typical for other states and the highest actual rate cap is in Missouri with 1950% APR.
Who’s the winner?
Ultimately it’s Australia. With a national cap of 24% on fees for payday loans of less that $2,000, it ensures lower income and bad credit borrowers nationwide have some sort of protection when they choose to take out one of these loans. In the US, the differences in state legislation mean that borrowers in one state may be sufficiently protected from exorbitantly priced fees, while those one state over are stuck with APRs that reach into the thousandth percentile. The ban on payday loans in other US states has left those in need of financing and ineligible for traditional credit in the lurch and falling prey to the loans that are outside the definitions of a “payday loan”.