Short-term high-cost credit has been described by FinCoNet (FinCoNet, 2017) as the practice of lending to consumers:
Amounts of money that are small relative to other forms of credit in the market, for short periods of time (most commonly for durations of under 12 months), at a rate that is considered to be high compared with other credit products available to consumers in their jurisdiction.
Short-term high-cost credit products are referred to in different ways and display different features among responding jurisdictions: short-term high-cost credit, highcost short-term credit, payday loans, home-collected credit, small amount credit contracts (SACCs), short- term small-dollar credit (STSDC) or moneylending agreements. Their duration can vary from a few days and up to the following payday (payday loans), to a few months and up to a year repayable through instalments. Some jurisdictions consider also overdraft facilities and credit card debt as being short-term high-cost credit.
Some jurisdictions have adopted a codified definition of specific categories of shortterm high-cost consumer credit provided by specialised lenders in their markets. The definitions are based on elements such as the duration of the credit agreement, the amount borrowed, or the applicable interest rate. The examples of Australia, Canada, Denmark, Ireland, the Netherlands, South Africa, the United Kingdom and the United States presented below provide an indication of the variation of what is considered short-term high-cost credit among the jurisdictions covered by this report.
In Australia, specific measures were implemented in 2013 to regulate the short- term consumer credit market (Australian Government, 2009). The National Consumer Credit Protection Act of 2009 prohibits loans for up to AUS 2000 with a term of 15 days or less (which are defined “short-term credit”), and authorises Small Amount Credit Contracts (SACC).
The Act also establishes Medium Amount Credit Contracts (MACC), being loans with credit limits between AUS 2001 and AUS 5000, which are not offered by an ADI or a continuing credit contract and have a term of between 16 days and 2 years.
In Canada, there is no general definition of high-cost shorter-term credit. However, federal legislation provides a definition of “payday loan”, a specific type of short-term high-cost credit. Regulation of certain payday loans is at the Provincial (State) level for Provinces designated by the Governor in Council. To be designated, a province must enact legislative measures that “protect recipients of payday loans and that provide for limits on the total cost of borrowing under the agreements.” For Provinces that have not been designated, payday loans are governed by the generally applicable criminal rate of interest provisions of the federal Criminal Code.
In Denmark the Consumer Credit Act of 2013 (Danish Competition and Consumer Authority, 2013) defines short-term credit as a credit agreement concluded between a consumer and a creditor who is not a bank, without collateral, without condition of purchase of product or service, and whose term is maximum 3 months.
The Irish Consumer Credit Act (Government of Ireland, 1995) opts for the definition “moneylending”, and defines a moneylending agreement as a credit agreement into which a moneylender enters, or offers to enter, with a consumer in which one or more of the following apply:
- The agreement was concluded away from the business premises of the moneylender or the business premises of the supplier of goods or services under the agreement.
- Any negotiations for, or in relation to the credit were conducted at a place other than the business premises of the moneylender or the business premises of the supplier of goods or services under the agreement.
- Repayments under the agreement will, or may, be paid by the consumer to the moneylender or his representative at any place other than the business premises of the moneylender or the business premises of the supplier of goods or services under the agreement.
- Where the total cost of credit to the consumer under the agreement is in excess of an APR of 23 per cent., or such other rate as may be prescribed by the Minister for Finance.
In the Netherlands, short-term consumer credit is defined by the Dutch Authority for the Financial Markets as a consumer credit agreement which has to be paid back within 3 months, involving costs that exceed the statutory cost cap of 14% APR.
The National Credit Act (Republic of South Africa, 2005) defines short term credit transactions as credit transactions:
- In respect of a deferred amount at inception of the agreement not exceeding ZAR 8000; and
- In terms of which the whole amount is repayable within a period not
exceeding 6 months.
The Financial Conduct Authority defines high-cost short-term credit in its Handbook of rules and guidance as a regulated credit agreement:
- Which is a borrower-lender agreement or a P2P agreement.
- In relation to which the APR is equal to or exceeds 100% in relation to which a financial promotion indicates (by express words or otherwise) that the credit is to be provided for any period up to a maximum of 12 months or otherwise indicated (by express words or otherwise) that the credit is to be provided for a short term.
In the United States, the Financial Consumer Protection Bureau is currently considering the introduction of stricter rules on short-term credit at the Federal level. A definition that is valid at the Federal level can be found in the CFPB Rule applying to short-term credit issued in October 2017 (CFPB, 2017).
These are defined as short-term loans that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms.
The rule excludes or exempts several types of consumer credit, including: (1) loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; (6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (similar to loans made under the Payday Alternative Loan program administered by the National Credit Union Administration)(10) accommodation loans.