Saved or ‘SACCED’
Posted by Sharyn Tauro | 11 Feb
Small Amount Credit Contracts (SACC) colloquially known as payday loans, micro loans, short-term loans or cash advance loans are small, short-term, unsecured loans. Traditionally consumers availed of these loans by visiting the storefront and borrowing money. The process of acquiring the funds would include handing the credit provider a postdated cheque of value equal to the borrowed amount, plus the applied charges, which is cashed by the credit provider on customers succeeding payday. With the advent of the internet, the whole process is now be transacted on a virtual platform with applications made online and money being transferred electronically to the customer’s bank account. Repayments are also in an electronic form at debtor’s subsequent payday. This article gives a brief snapshot of the trends found in this industry in different countries across the world putting a special focus on whether these loans are a helping hand or a debt trap to the common-man.
The SACC industry in Canada has grown rapidly since the mid 90’s to an estimated 1,400 retail outlets across the country with nearly 2 million Canadians availing of this service per year . An inverse co-relation between income and payday locations was uncovered when Global News used tax data obtained from Statistics Canada and business location information from Red Lion Data to map out payday loan locations. Neighborhoods with over 14% of the population on social assistance had the highest number of payday loan businesses indicating that most of the SACC borrowers were from middle to lower income groups .
A customer survey conducted by the Financial Consumer Association of Canada pegged convenience and a faster access to money as the most stated reasons.  while surveys done across different provinces state the most common causes of unexpected household expenditure, a temporary reduction in income, loss of job as the most sighted reasons for taking out a loan. Currently payday lenders are regulated only at State level, as there is no National regulation in place yet for this industry. These regulations typically include:
- Restriction on the loan amount: less than $1500 or 50% of paycheck
- Restriction on interest rate: mostly capped at 23% or lesser
- Restriction on term of repayment- not before subsequent payday, not more than 62 days
- Restriction on concurrent loans from a single lender.
According to Consumer Affairs in 2012-13 nearly 10.2 million payday loans were issued in UK amounting to £2.8 billion with customers on an average taking out 6 loans in a year  making it the largest SACC industry in Europe. The reasons for taking out SACC loans varied from ease and convenience to being the only form of credit available to a consumer.
The payday industry was relatively unregulated until early 2015 when the Financial Conduct Authority had to take emergency action due to the huge slew of complaints from both consumers and debt charity organizations helping consumers deal with debt management. Till then payday lenders could charge up to 5000% in APR on the extension of loan term or in case of a missed repayment. Lenders were also found to be resorting to unethical debt collection methods by sending threatening letters to nonpaying customers .
The new rules came into effect in 2015. Lenders were given a statutory deadline of 23 August and an extended statutory deadline of 22 December before which they had to implement remedial action. The new rules are summarized as follows:
- Restriction on daily interest rate and fee: cap of 0.8%
- Restriction on total amount paid in charges: cap of amount not exceeding twice the amount advanced
- Restriction on late payment fees- cap of £15
However, some lenders quit the market before the changes took place stating that the new rules made business unviable. These include Minicredit, which ceased its lending on 10th of December 2014. 
United States of America
The payday lending industry in USA is nearly worth $46 billion of which $4 billion are contributed by online loans .
According to the immense research conducted by the Pew Charitable Trust, an independent non- profit into the payday lending industry, around 5.5% Americans take out payday loans with an average of eight loans per year of $375 paying about $520 on interest. The most common reasons stated for taking out loans include paying mortgages or rent, for food supplies and utilities, to pay unexpected bills or medical expenses or for gifts and entertainment. Currently regulation is only at State level for this industry, but the consumer Financial Protection Bureau has warned lenders of an imminent National Regulation coming into force due to concerns of high debt post the global financial crisis. Of the 50 states comprising USA, SACC loans are legal in only 36 states of which nine only allow for storefront lending with increased restrictions. The 28 states that allow for payday lending have the most relaxed rules and allow for 15% or more establishment fees with APR’s ranging from 391-521%. The nine relatively permissive states have more restrictions on fees and interest rates. The interest though capped at 10%, still allows for a high APR with a customer able to take out a maximum of eight loans per year. The remaining restrictive states either do not permit SACC loans or have such restrictive regulation making the industry unviable. In these states, the APR cannot exceed 36%.
The first time a SACC loan was offered in Australia was way back in 1998 . Since then this industry has burgeoned into a mammoth entity on the Australian credit landscape with NCPA reporting the SACC usage for 2014-2015 at 1.3 million contracts amounting to nearly $800 million in revenue through approximately 400 registered or licensed credit providers . The different reasons that customers take out SACC loans in Australia were very similar to those mentioned in other countries including to pay bills (44%) to pay for groceries (29%) to pay for unexpected expenses like vehicle repair medical bills, for school fees or supplies. Independent studies carried out by two groups, of people taking out SACC loans replicated results seen in Canada that the most number of loans were taken out by people from the lowest socio economic backgrounds (earning less than $30,000 yearly or having casual jobs) with most of them on Government benefits (Centrelink). The borrowers also had a high percentage of people suffering from physical, psychological, or emotional health problems. In 2009, The National Consumer Credit Protection Act was passed, which put the following restrictions on payday loans
- Restriction on the loan amount: less than $2000
- Restriction on interest rate: 20% establishment fee and 4% on-going monthly fee
- Restriction on term of repayment- not before 16 days not more than 1 year
In addition, Lenders need to make reasonable inquiries to ascertain whether a credit contract would be ‘not unsuitable’ for a customer. This onus includes the obligations to make inquiries into a customer’s financial situation, inquire as to the reason for the loan, and to take steps to verify the customer’s financial situation as well as their capability to make repayments without incurring substantial hardship.
Blessing or Curse?
As with most industries the payday loans sector too has its fair share of detractors and supporters. There is a constant ongoing debate between Governments, Financial Regulatory bodies, payday lenders, charity organizations and consumers if payday lending is a much-needed financial resource, or does it do more harm to the financially vulnerable sections of society and the extent of regulations imposed.
A number of people accessing payday loans come from geographically and socio-economically secluded sections of the community, who in most cases have bad credit histories, excluding them from consideration by mainstream financial institutions. Lack of fixed incomes and financial knowledge often leads to humiliating experiences with traditional lenders. SACC lenders fill this gap by providing high levels of customer service with easy to understand terms and conditions making customers feel financially included. Payday loans are extremely attractive due to their relative simplicity, ease of use and fast set up without the need of extensive paperwork helping people avoid the humiliating experience of having to go to pawnbrokers. Borrowers in acute financial need have somewhere to go to making them feel in control of their life and debt resulting in the high demand for these loans.
The issues of concern on the other hand are that many borrowers use these loans as part of a monthly budget as opposed to an emergency resource. These loans being unsecured tend to have very high establishment fees and rates of interest often-requiring payments in lump sum, which can result in debt spirals for borrowers. Lack of adequate suitability checks run the risk of lending to people who may use the money to fan their addictions of alcohol, drugs, gaming or to people suffering from mental health issues. At times, some payday lenders have made additional unauthorized withdrawals. This resulted in overdrawn customer accounts, which were then shut down by banks. In some cases of online payday lending, incomplete scrubbing and sale of customer financial and banking data has put customers at risk of identity theft. Borrowers have reported of lenders resorting to unethical means to recover loans including threats made on phone and via letters as well as repeated calling to customer’s workplace, employers, family and friends well beyond the permissible limits set by ASIC in Australia and other regulatory bodies elsewhere .
These findings raise serious concerns on the SACC industry and many people propose a ban on payday loans. Lenders counteract the argument by stating that they provide a valuable financial resource to the most financially weak sections of society without which borrowers would resort to black market loan sharks and overseas-unregulated lenders. The most valid point in the argument is that everyone deserves unbiased access to credit. This situation puts the onus on policy makers, with input from both borrowers and lenders, to bring regulations into effect resulting in safe and transparent marketplace, which while providing a financial service to customers does not run companies out of business.
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