Australian payday lenders face heightened scrutiny following a March 2025 review by the Australian Securities and Investments Commission. The watchdog has identified concerning practices within the industry that may breach consumer protection laws. This prompts urgent guidance for borrowers considering short-term credit options.
The review revealed a pattern worth noting. Some lenders appear to be steering vulnerable borrowers away from small loans with robust protections into medium-sized loans offering fewer safeguards. The total value of small and medium loans provided to Australian consumers in 2023-24 reached $1.3 billion. Yet the proportion of properly protected small loans has declined substantially.
Understanding the Shift in Lending Patterns
The 2022 legislative reforms introduced substantial protections for small loans under $2,000. These measures were designed to prevent debt spirals through fee limitations and repayment caps at 10% of income. Restrictions also prevent lenders from approving a third loan if borrowers have already obtained two within 90 days.
Initial implementation showed promise. However, ASIC’s data analysis reveals that small loan credit contracts declined from 80% of all loans in the December 2022 quarter to less than 60% by August 2023. This shift represents more than changing consumer preferences. It reflects a potential circumvention strategy within certain industry segments.
How Protection Avoidance Works
The issue centres on loan sizing and classification. Consider a borrower requiring $800 for vehicle repairs. Under small loan regulations, a licensed provider like CashPal would apply maximum fees of 20% establishment plus 4% monthly. However, if the same borrower receives a $2,500 loan offer instead, that transaction falls under medium loan rules lacking the same fee caps or income-based repayment restrictions.
This practice raises questions about loan suitability. Medium loans don’t carry the same protections and potentially expose borrowers to extended repayment periods with higher overall costs. ASIC has signalled that steering borrowers toward larger loans may violate responsible lending obligations requiring lenders to ensure credit contracts align with consumer requirements.
Critical Verification Steps Before Applying
Financial experts recommend five verification steps before finalising any payday loan application. These measures protect against the specific risks ASIC has identified.
Confirm Australian Credit Licence Status
Every legitimate payday lender must hold an Australian credit licence issued by ASIC. Borrowers can independently verify licence status through ASIC’s MoneySmart Professional Registers. This verification step gained importance following recent enforcement actions.
ASIC’s Federal Court proceedings against Cigno Australia and BSF Solutions exposed the consequences of unlicensed operations. These entities charged over $70 million in fees to more than 100,000 consumers without proper licensing. Some borrowers faced fees exceeding 600% of their original loan amounts. Documentation showed one consumer borrowed $200 and paid $177.75 in fees within two months. That same person then borrowed an additional $600 and incurred another $703 in fees.
Verify Loan Amount Appropriateness
Borrowers should question any loan offer exceeding their stated financial requirement. Responsible lenders assess borrower needs and offer minimum necessary amounts rather than maximising loan values.
Key questions include:
- Why is the offered amount larger than requested?ย
- What protections change with the proposed loan size?ย
- Can the lender justify this amount based on the stated purpose?
Calculate Total Repayment Costs
Australian regulations cap payday loan fees at 20% establishment fee plus 4% monthly fee. For a $1,000 loan over 12 months, total repayment reaches $1,680. That represents 68% more than the borrowed amount.
ASIC’s MoneySmart website provides calculation tools enabling borrowers to determine true costs before commitment. Transparency around total costs represents a fundamental consumer protection. Lenders who provide vague cost information or resist clear fee breakdowns warrant scrutiny.
Review Recent Borrowing History
Current regulations presume a loan unsuitable if the applicant has obtained two payday loans within the preceding 90 days. Lenders must verify recent borrowing history as part of responsible lending assessments.
Borrowers can access their own credit files annually at no cost through credit reporting bodies including Equifax and Experian. These reports detail recent credit applications and existing obligations while providing verification of compliance with the two-loan rule.
Confirm Income-Based Repayment Compliance
Legislative requirements mandate that payday loan repayments cannot exceed 10% of after-tax income over the repayment period. For a borrower with $800 fortnightly take-home pay, maximum repayments should not surpass $80 per fortnight.
Borrowers should independently calculate this threshold before lender assessment. Proposed repayments exceeding this statutory limit indicate non-compliance with consumer protection legislation.
Warning Indicators of Problematic Practices
Several red flags should alert potential borrowers to proceed with caution. Loan offers substantially larger than requested amounts without clear justification represent a primary concern. Inability or unwillingness to provide Australian credit licence numbers raises immediate questions. Absence of thorough affordability assessments should trigger alarm bells.
High-pressure tactics or discouragement from reviewing contract terms indicate poor lending standards. Loan approvals despite obvious indicators of repayment difficulty violate basic responsible lending principles. Undisclosed fees or charges appearing only in fine print demonstrate lack of transparency.
Lower-Cost Alternative Solutions
Average payday loan debt in Australia reached $1,337 as of December 2024. Younger Australians aged 18 to 29 carry the highest average debt at $1,548. However, multiple lower-cost alternatives exist for Australians facing temporary financial shortfalls.
No Interest Loans Scheme (NILS)
This community-based program provides loans up to $2,000 for essential purchases including appliances and vehicle repairs. NILS carries no interest charges and no fees whatsoever. Over 170 community organisations administer these loans at more than 600 locations nationally.
Eligibility requires annual income below $70,000 for single applicants or $100,000 for partnered individuals with children. NILS providers structure repayments according to individual capacity.
Centrelink Advance Payments
Most Centrelink payment recipients qualify for advance payments through Service Australia. These advances carry no interest or fees with repayment occurring through small deductions from future payments. Applications are processed through the Service Australia website.
Utility Provider Hardship Programs
Service providers for electricity and telecommunications typically maintain hardship programs offering payment plans or extensions. Direct communication with providers before seeking credit often yields more sustainable solutions than borrowing to meet utility obligations.
Professional Financial Counselling
The National Debt Helpline (1800 007 007) connects callers with qualified financial counsellors who provide free assistance. These professionals understand consumer rights and can negotiate with creditors while identifying solutions specific to individual circumstances.
Consumer Rights and Complaint Mechanisms
Australian consumer credit legislation establishes specific borrower protections. These include the right to thorough responsible lending assessments before loan approval and clear disclosure of all fees prior to contract execution. Protection against unsuitable loans that fail to meet stated needs or would cause substantial hardship also exists.
When lenders violate these protections, borrowers can lodge complaints with the Australian Financial Complaints Authority (AFCA) at no cost. AFCA possesses authority to order fee refunds or debt cancellation.
Direct misconduct reporting to ASIC through their official channels contributes to oversight and may prevent other Australians from encountering similar issues.
Industry Standards and Licensed Operations
The payday lending sector includes numerous licensed providers operating within frameworks. Established lenders such as CashPal maintain Australian credit licences and adhere to responsible lending obligations. The distinction between compliant and non-compliant operators emphasises the importance of verification before proceeding with any loan application.
Borrowers researching payday lenders should prioritise licence verification and fee transparency. These factors distinguish legitimate operations from those attracting attention.
Taking Protective Action
Borrowers should apply a structured due diligence process before entering any payday lending agreement. Start by verifying that the lender holds a current Australian credit licence. Ensure the requested loan amount directly reflects your actual financial requirement to avoid unnecessary debt exposure.
Carefully calculate the total repayment amount including fees and interest. Always compare multiple products to identify the most cost-effective solution. Confirm that scheduled repayments will not exceed 10% of your regular income. Review your recent borrowing history to ensure compliance with the two-loan rule that limits concurrent borrowing.
These protective checks require minimal effort but offer substantial safeguards against predatory lending practices. The framework continues to evolve to protect vulnerable borrowers from exploitative financial products.
By equipping themselves with basic verification tools and knowledge of their rights, consumers can make safer borrowing decisions. This minimises the risk of financial harm when navigating the payday lending market.