The tighter things are financially, the more vulnerable we become to anything which might give us some relief from financial pressure. Being vulnerable, of course, makes us a target for hazardous financial products and services like the payday lenders we have previously discussed on this blog “Nothing is Free – The Interest Free Trap and How Not to Be Held Captive.”

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Now, brace yourself for some shocking statistics – a 2014 study by NAB found that 1 in 5 Aussies rarely or never had any money left at the end of their pay cycle! If you think that’s bad, it gets worse – by 2019, a whopping 50% of Australians had saved less than $200 per month on average, and 16% of people aged 25-34 admitted to having no money left by payday.

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Combined with the impact of COVID and the conclusion of financial support by the Australian Government in March 2021, thousands of Australians are now facing the prospect of picking up the pieces of their shattered finances, wondering if it will ever be possible to break the debt cycle. 

What Is the Debt Cycle?

Being caught in the debt cycle is a catch-22 – you have bad debt, so you borrow money to pay it, but by borrowing more money, your debt gets worse. The typical debt cycle often starts with having insufficient funds.

Sometimes an unexpected expense will arise, causing your expenses to exceed your ability to pay for. If you don’t have a great financial situation to begin with, you might also have a poor credit rating, and if so, you are more likely to be deemed a risky borrower and will only be eligible for high interest loans.

High interest loans mean astronomical repayments, and if you miss or aren’t able to make the full repayments, you will get charged penalty fees and the interest expense grows. This leads to a worsening financial situation, and unfortunately in some cases, the cycle repeats. Once you’re stuck, it can be very hard to break the debt cycle. 

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Debt Cycle Factors and Fixes

1. Buy Now Pay Later Financing and Payday Loans Australia

Payday loans are a huge contributor to the debt cycle, and similar to the way that buy now pay later operators have gained immense popularity in recent years, online payday lenders have exploded five-fold over the past 12 months.

These internet-and-social-media-based lenders offer stylish branding and seamless digital experiences (sometimes even apps), which are cleverly targeted toward the millennial demographic (those aged 30 or younger, who also happen to be among the most financially strained group of people in Australia.

To protect Australian consumers, lenders have been prohibited from financing loans of $2000 or less that must be repaid within 15 days or less, and there are legal limits to the amounts that these lenders can charge. ASIC regulations as at February 2021 stipulate that:

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- Credit providers are legally obliged not to enter into contracts deemed “unsuitable” (such as loans which clearly cannot be repaid without suffering hardship); lenders must make “reasonable” enquiries about consumers’ requirements, objectives and financial situation; and steps must be taken to verify applicants’ financial situations;

- Lenders can collect no more than 200% of loans amounting to $2000 or less; and

- Lenders can charge a 45% maximum annual interest rate including fees and other charges on loans of $2001 or more (note that Authorised Deposit-Taking Institutions such as banks, credit unions and building societies are exempt from these fee caps). Even with these regulations in place, it is still possible that people can get into trouble by taking on payday loans as interest can seriously add up! $2000 plus $200% is $6000 – that’s triple the amount initially borrowed! 

What if I’m struggling with a payday loan? The good news is that payday loans do not have to be the answer, and we strongly recommend seeking financial debt help from a professional, third party (non-lender) about the options available to you, before you sign a contract making you liable to pay exorbitant fees, charges and interest. Sounds obvious, but the only way to break the debt cycle, is to get out of debt. 

2. Rent-to-buy Agreements - What Are They?

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If you are low on cash, rent-to-buy agreements may seem like a convenient solution when you urgently need an appliance (such as a laptop or a fridge). However, in the long run, it is not unusual to end up paying figures such as $2000 for an $850 fridge in these arrangements – way in excess of what the rented items should cost. Unfortunately, it is the financially vulnerable who are most likely to fall prey to the rent-to-buy trap.

What are some alternative rent to buy options? Rather than finding yourself caught up in such an arrangement, Centrelink recipients can sign up for the “no interest loans” (NILs) scheme. For individuals who are not on Centrelink, the best option is to either save (if this is an option) or seek out a loan which has a lower interest rate.

Before you sign up for anything, make sure to calculate the amount of interest you will be paying and read the fine print and schedule of fees and charges, so as not to receive any nasty surprises. 

3. Credit Repair Services - What Are They?

The main purpose of any credit repair service is to remove defaults, errors in reporting from lenders or errors in personal information from your credit report.

It can be quite tempting to go to a credit repair service if previous defaults are preventing you from getting a loan or a credit card. However, it is worth considering the fact that some of these services can cost over $1000 to do administrative tasks which you could do yourself, and thus paying exorbitant fees for these services may further detriment your financial situation. 

I’m tempted to try a credit fix or credit repair service – what else can I do? You can actually obtain a free copy of your credit file from any of the credit reporting agencies in Australia, such as Equifax, Illion, Dun and Bradstreet or Experion.

Once you know who has put the default on, you then need to get in touch with them and negotiate an arrangement to pay the debt (if not already paid), or if you no longer have the debt, request a formal notice of confirmation and balance, and supply this to the credit reporting agency.

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If you have a court ordered default, you will require a court-sealed notice of discontinuance and consent order to set aside the judgment in the court system, and then you must supply this to the credit reporting agency. For more information about how credit files and credit reporting works, check out our article: “Creditworthiness, Credit Files, Scores and Reports in Australia”. 

Another Alternative - Part 9 Debt Agreements

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If you have found yourself in the situation of having multiple debts and you can’t seem to find a way to break out of the debt cycle, then a Part 9 Debt Agreement can be a great option.

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You may be eligible for a debt agreement if you satisfy the following criteria:

- You are unable to pay your debts when they are due;

- You have not been bankrupt or had a Debt Agreement in the last 10 years;

- You have unsecured debts of less than <ahref="https://www.afsa.gov.au/insolvency/how-we-can-help/indexed-amounts-0"> $118,063.40  

Have divisible property valued at less than <a href="https://www.afsa.gov.au/insolvency/how-we-can-help/indexed-amounts-0"> $236,126.80

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Expect that your after-tax income for the next 12 months will be less than <a href="https://www.afsa.gov.au/insolvency/how-we-can-help/indexed-amounts-0"> $88,547.55

If there is no foreseeable way for you to get out of debt and you’re ready to break the debt cycle, our team of Credit Counsellors are here to provide informed professional debt help to assess your financial situation and point you in the right direction. Call us on 1300 003 328 for an obligation-free consultation to find out your options.