• Household debt is at record levels, leaving families in dire situations. (Getty)
Payday lenders are one of the only sources of fast cash for many low-income households caught in a cycle of debt.
Nicola Heath

30 Nov 2017 - 1:57 PM  UPDATED 8 Dec 2017 - 4:50 PM

As Australia heats up on its way to summer, families are starting to plan Christmas meals, lazy days spent in air conditioning at home or by the backyard pool and festive gatherings. But this all costs money and in most cases, it also means surging electricity usage and charges.

This something Aussie households know all too well, having just come off the back of the 2017 winter with hefty energy bills that were, on average, higher than usual. On July 1, major energy providers including AGL, EnergyAustralia and Origin Energy raised power prices by up to 20 per cent in New South Wales and South Australia.

For many families, it means another trip to a payday lender to apply for a short-term, high cost loan to cover the latest bill. The 2015 Digital Finance Analytics (DFA) report found that almost nine per cent of payday loans were for water/gas/electricity bills.

“Debt, in itself, is not a problem. It's what the debt is used for.”

Australia's household debt to income ratio is 190 per cent – meaning that we owe almost double what we earn. That’s a record high, thanks in part to slow wages growth and a housing affordability crisis in the capital cities.

“It's simply not sustainable,” says Gregory Mowle, a lecturer in finance at the University of Canberra. 

“Debt, in itself, is not a problem. It's what the debt is used for,” Mowle says. “Getting a large mortgage to buy a quality home in an area where you think there's going to be capital growth? That's okay. But going into debt to acquire consumer items – those items fall in value straight away.”

Australia's household debt to income ratio is 190 per cent – meaning that we owe almost double what we earn.

The DFA and Monash University report found that 31.8 per cent of Australian households are in financial stress, up from 23.5 per cent in 2005.

Many financially stressed households turn to payday lenders to access emergency funds. In 2005, over 350,000 households reported using payday loans in the last three years. In 2015, that figure almost doubled to more than 650,000. 

Unemployed Melbourne father Allan, who tells his story in SBS six-part documentary Struggle Street series two airing this month, has accumulated a $35,000 debt through motoring fines and short term loans. “I couldn’t keep up with the payments and then the interest went up, kept going up… to the point it was like four, five times, seven times I had to pay back,” he says in the show.

Hanging over Allan’s head is the possibility that at any moment the Sheriff could repossess the ute he needs to run his new landscaping business.

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Allan’s wife Nan works irregular shifts at a local plastics factory, which means the family’s income fluctuates from week to week. “Whatever my wife makes, it pretty much goes on everything, the rent, the bills, food, education, petrol, maintenance.” At the end of the week, he says, “we’d be lucky…if we have like a hundred bucks.”

Mowle, a former financial counsellor, recently completed a research project into the use of payday loans. He acknowledges the service the small amount credit contract (SACC) sector provides for people who can’t access credit through mainstream lenders.

He says some cultural groups are more inclined to seek finance than others. “A lot of clients from a Pacific Islander background were coming in to get a loan of, say, $500 to send back home, because they needed to cover funeral costs for an extended family member,” he says.           

These clients told Mowle that “it would cause them great shame and embarrassment if they were to say, ‘look, I don't have the money to contribute to the funeral costs,’ so that's why they're coming into a payday lender to borrow money at effectively 100 per cent interest.”

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It only takes the next gas, electricity, phone or insurance bill to arrive for a household’s debt burden to become unmanageable. “They have to go back to the payday lender and say, ‘well, can I get another $200 to pay the electricity bill?’ or ‘can you reduce the payments?’” says Mowle. “Payday lenders will say yes.” 

In places like Sydney’s western suburbs Mowle encountered a high level of housing stress – when more than 30 per cent of household income is spent on rent or mortgage repayments.

It only takes the next gas, electricity, phone or insurance bill to arrive for a household’s debt burden to become unmanageable.

“As soon as you have a housing cost taking more than 50 per cent of your household income, then you're not going to have enough money to pay the bills and necessary living expenses, let alone have money left over for any luxuries,” he says.

A lack of financial literacy

Many people said they needed the money to cover expenses like car registration or utility bills. That may be true, says Mowle, but a look at their budget for the previous three months showed they weren’t preparing for upcoming bills.

“If you don't have the financial literacy, to say, ‘I'm going to have a bill for the car registration coming in six months’ time, so I'd better start to put money aside for it,’ then it's only natural that you start to spend the money on other items, which are not essentials.”

Few people Mowle interviewed were aware of the existence of financial hardship resources like financial counsellors, no interest loan schemes or credit card payment plans. 

One payday lender client, a mother of seven who received Centrelink payments, told Mowle she was applying for a $1000 loan to cover a gas bill. She would have to repay $1700 over seven months to the loan provider. Mowle told her the gas provider was required to provide her with financial hardship options, such as a payment plan. She was staggered that option was available, says Mowle.

“If you don't have the financial literacy... then it's only natural that you start to spend the money on other items, which are not essentials.”

Escaping the debt cycle 

The first step to ending the cycle of debt exacerbated by short-term, high-cost loans is to acknowledge that it exists. Many families are in denial, says Mowle. “Bills are coming, but they're putting it on the credit card, and then the next month, they're paying the minimum monthly payment on the credit card. Then they get offered the credit card limit increase.” 

The government-run ASIC MoneySmart website provides impartial financial advice. A financial counsellor can first help create a balance sheet to show how debt is funding a shortfall in income, and then a budget to help manage finances. “Unless you make the changes to your lifestyle, nothing is going to change,” says Mowle.

Love the story? Follow the author on Twitter: @nicoheath or Instagram: @nicola_heath. 

Find information about financial counselling at Salvation Army’s Moneycare website.

If you or someone you know needs support, you can contact Lifeline on 13 11 14.

All six episodes of Struggle Street series two are available to view on SBS On Demand

Struggle Street series two is produced by KEO Films with funding support from Screen Australia and Film Victoria.

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