Buy now, pay later schemes for Australian renters ‘prey on vulnerable’, financial counsellors warn

New buy now, pay later-style schemes targeting renters are “preying on the vulnerable”, say consumer advocates who have renewed calls for the federal government to overhaul credit laws to better regulate the sector.

A recent entrant into the market, Tenanting, follows the model of buy now, pay later (BNPL) products such as Afterpay, which offer microloans for retail purchases that users can then pay back in four instalments.

Tenanting advertises that it will pay rent on an individual’s behalf “instantly” with the user repaying it over four instalments with the addition of a 5% fee.

Financial Counselling Australia (FCA) has taken aim at the company, calling it “yet another alarming example of a fintech company taking advantage of loopholes in the credit laws”.

Spokesperson James Hunt said financial counsellors were increasingly seeing people harmed by BNPL-style products and they were warning people against using them for day-to-day living expenses such as groceries or rent.

“Using products like these might seem easy and harmless but the charges quickly add up and the next thing you know you’re in even more financial trouble,” Hunt said. “We’re very worried that will only exacerbate financial hardship.”

Greater Sydney’s median weekly rent for a two-bedroom apartment is $515, according to the Tenants’ Union of New South Wales. The addition of a 5% fee would leave the average renter paying $25.75 more a week, a significant amount for someone on a low income.

Fiona Guthrie, the chief executive of Financial Counselling Australia, wrote on Thursday to the federal treasurer, Josh Frydenberg, and the federal minister for financial services, Jane Hume, urging them to commission an independent review of the legislation that governs financial products, with the view to developing more effective regulation.

“Because these companies operate outside of the national credit code, there are no legal requirements to assess a person’s ability to repay, nor are they required to have proper hardship procedures in place if people find themselves struggling,” the letter states.

An earlier letter sent by the organisation in December urging better regulation received no formal response.

A spokesperson for Hume said on Thursday that while the minister had not received a formal request for a meeting she would welcome an approach to discuss “this important sector and the issues raised”. Hume and the Treasury had “worked constructively with FCA as valued stakeholders and will continue to do so into the future”.

“The Morrison government values the vital community work undertaken by financial counsellors, a sector that has been vital in Australia’s response to the Covid-19 pandemic,” the spokesperson said.

“Over the past two years, the government has allocated more than $7m to FCA, reaffirming their important role in supporting the financial well-being of Australians.”

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But Hunt said “there’s a bigger picture here”.

“We know a lot of people are feeling stuck financially, forced to take on debt,” he said. “People need more adequate and empowering income support, not more fintech companies preying on their financial vulnerability.”

Tenanting’s fee schedule is more aggressive than some other companies offering similar financial products targeted at renters.

RentPay, an offshoot of rental listings site Rent.com.au, bills itself as a long-term flexible payment planning service for renters. But it also offers a product called Safetynet, which allows the renter to draw a short-term line of credit to the total of one week’s rent, which they can then repay over four instalments. Each missed repayment accrues a $15 fee.

RentPay also offers rental bond loans that don’t accrue interest if they are paid back within 21 days. The company told Guardian Australia, however, that 80% of its customers who received one of these loans did not repay within that timeframe.

“We see ourselves as the champion of renters, and we believe that renting should be better,” the Rent.com.au CEO, Greg Bader, said.

“A lot of the things we build are around making renting easier. I don’t think we take advantage of any loopholes or push people into debt spirals. I think the flexibility we offer in the product actually helps people manage their money better.”

Bader said Safetynet was developed in response to customer demand as an emergency mechanism. “It’s not there to be used for an everyday thing.”

In a statement, a spokesperson for Tenanting said: “We provide tenants with a flexible payment option to pay rent as a better alternative to predatory payday lenders. We are decentralising the rental system and putting control back in the hands of the Australian public.”

Leo Patterson Ross from the Tenants’ Union told Guardian Australia the rental payments system could do with more flexibility for tenants, especially those with variable incomes, but BNPL-style schemes were “not the way to do that”.

“The people who are most likely to have financial pressures that push them to a solution like this are the kind who are least able to ride those extra payments, so it’s least in their interests,” Patterson Ross said.

In many states in Australia, unless a tenant is frequently late with rent, those who fall into arrears can retain their tenancy if they pay the rent in full before an eviction date, often even in cases where a tribunal has made an eviction order.

State governments also offer hardship provisions and, in some cases, bond loans for renters who are struggling to come up with large lump sums at short notice.

“The key here is that there’s no interest paid on that amount,” said Patterson Ross.

“Australia can generally do better in bringing in hardship protections for people who are in some kind of financial strife – but they don’t need to borrow the money from [for-profit] lenders like this. And if they do, it’s a sign that the amount of support we have in place for them isn’t sufficient.”

Frydenberg has been contacted for comment.