Nearly a quarter of Gen Z Australians have used a pay-on-demand service to access their income ahead of time, new data suggests, as young workers turn to app-based firms offering a new spin on old-fashioned payday loans.
Research from comparison website Finder suggests 22 per cent of Gen Z Australians have turned to a pay-on-demand service at least once, making them the cohort most likely to use next-generation lenders.
Gen Z was also the most likely to report being “extremely stressed” with their current financial situation, with 37 per cent of respondents saying they could “get by” for less than one month on their current savings alone.
An August survey of more than 1,000 Australians found Millennials were the next most-likely to report using a pay-on-demand service, at 11 per cent.
The generational divide was even clearer among Baby Boomers, with less than 1 per cent of respondents claiming they had accessed a short-term loan through a pay-on-demand service.
The data is backdropped by the rapid growth of the pay-on-demand market, built around apps and websites offering short-term loans with ‘fees’ instead of interest.
MyPayNow, a major player in the field, offers loans of up to 25 per cent of an applicant’s pay cheque, with a limit of $1,250. For the pleasure, users are hit with a flat 5 per cent fee instead of interest. Advances are then repaid via direct debit on payday.
Competitor Beforepay goes a step further, offering borrowers to split their repayments into four equal portions, borrowing the functionality of buy now, pay later giants like Afterpay.
Slick interfaces, easy access to loans, and near-instant payments can make pay-on-demand services appealing to young Australians, said Finder managing editor Kate Browne.
But the uptake of these services by younger Australians is “concerning,” she said, given the way many pay-on-demand services distance themselves from the traditional payday lending sector — and the high cost of short-term loans.
“This is, at the end of the day, a payday loan,” she said. “In essence, it’s dressed up as a new way of accessing money.
“So proceed with caution.”
The risks of pay-on-demand
Young Australians are more likely than older demographics to participate in part-time or insecure work, meaning many Gen Z workers cannot rely on a steady income.
The problem was exacerbated by the COVID-19 pandemic, which led to the months-long shutdown of retail, hospitality, tourism, and arts venues across the country — all of which attract workers at the start of their careers.
Backdropped by lockdowns and a spike in unemployment rates, the pay-on-demand sector grew five times larger through 2020.
It has only expanded since, buoyed by record-low interest rates and the declining use of credit cards.
Although Australia’s governments have committed to limiting the use of lockdowns, Browne feared young Australians using pay-on-demand services are still at risk if their work dries up.
A 5 per cent fee on a $1,000 payday advance may equate to $50, a make-or-break amount for workers already operating on the very edge of rent, groceries, and bills.
“Nothing’s guaranteed, particularly in this environment at the moment, where we don’t really know how the next week is going to pan out,” she said.
Many entrants in the field are not required to hold membership with the Australian Financial Complaints Authority, limiting the avenues for users to seek redress, but industry players claim to offer customer support services.
An old system with a new playbook
Browne added that the terms of many new services “can sound like a better deal, or more appealing, like you don’t have too much skin in the game. But there are there are issues about that.”
Small pay-on-demand advances are marketed as tools to get borrowers out of tight spots, including Australians who, for whatever reason, have trouble accessing ordinary payday loans.
But “what could be seen as a pro I also see as a red flag,” Browne said.
Many pay-on-demand customers are not subjected to the same credit checks required by traditional payday lenders.
This means some borrowers may have access to advances which other lenders would refuse outright. In other words, loans could be provided to borrowers less likely to pay in time, or in full.
Australians who find themselves with repayments beyond their means could fall into a “debt spiral”, Browne said, where borrowers chase advances from other providers to repay their initial loan.
Consumer advocate groups including Financial Counselling Australia say the industry currently has too much leeway to provide loans, outside of established responsible lending protections.
However, operators in the sector maintain their own checks and balances are up to scratch.
MyPayNow maintains its in-house screening protocols are strong enough to protect applicants from improper lending, saying its own processes go above and beyond what a government regulator would mandate.
Borrowers missing some benefits
While falling behind on a pay-on-demand repayment can damage a borrower’s credit score, users cannot build it by repaying on time.
“Your credit score may not mean anything when you’re 25,” Browne said.
“But any, any negative marks against your credit score hang around for five years, and at the age of 30, you may be in a very different place to where you were at 25.”
This, coupled with the fact timely repayments are ‘invisible’ on a user’s credit score, means some young Australians may be taking on significant risk through pay-on-demand services.
While credit cards come with their own set of risks and drawbacks, Browne suggested that young Australians with the ability to make steady repayments consider the benefits of a solid credit score.
“You need to approach with caution, and you need to pay it off within the interest-free period,” Browne said.
“But credit cards, you know, it goes both ways, and you do get some more advantages.”
Before considering any of those potentially high-cost options, Australians whose finances have been negatively impacted by COVID-19 can also look into interest-free loans of up to $3,000 through the federal government’s Household Relief Loans scheme, operated in partnership with NAB and Good Shepherd.
With consumer spending on the rise in response to eased lockdown conditions, Browne said young Australians should read the fine print and assess whether a loan could leave them worse off than before.
“They’re an option, but just go in with your eyes open,” she said.
If you’re struggling with debt, contact the National Debt Helpline.