Cash Converters will fight a $40 million class action amid claims it had charged customers excessive interest on personal loans.
Law firm Maurice Blackburn initiated the class action on Thursday in the Federal Court, alleging thousands of customers had been caught out by the company's exorbitant interest rates.
It is alleged Cash Converters customers have been paying interest rates of up to 633 per cent on some loans, despite laws in NSW capping rates on such loans at 48 per cent.
Shares in Cash Converters fell almost 10 per cent on opening after the launch of the class action, but rebounded to end the day down 3.6 per cent at $1.21.
The basis of the legal claim is that Cash Converters acted unconscionably and devised and put into place a system that would enable it to evade the 48 per cent interest rate cap on short-term loans.
It alleges that that system allowed Cash Converters to slug people up to 633 per cent on small loans and about 145 per cent on slightly larger loans between 2010 and mid-2013.
The action is expected to put fresh focus on so-called pay-day lenders that typically provide loans of between $200 and $2000 that must be repaid within a short time. Cash Converters is one of Australia's largest pay-day lenders.
In recent years consumer groups have pushed regulators to control tightly the interest charged on small loans. A cap on interest is in place in NSW, Victoria and Queensland.
Maurice Blackburn believes about 45,000 Cash Converters customers in NSW were affected by the high priced-loans. The action, filed on Thursday, only applies to NSW customers.
Cash Converters general manager Ian Day said on Thursday the company would "vigorously" defend the allegations.
In a statement to the Australian Securities Exchange, the company said it was "confident that the fees have been properly levied and are completely lawful".
"The claimed amount of these total fees referred to seems vastly inflated given that NSW is the smallest state by number of Cash Converters stores and the lending there was only for a period of some three years," the statement said.
Maurice Blackburn NSW special counsel Miranda Nagy said the action was seeking to get back for Cash Converters customers the difference between what would have been a 48 per cent interest rate and the allegedly illegal interest rates on small loans.
The estimation of $40 million is based on data that Cash Converters publishes in its annual reports about how many loans it distributes in NSW, and what the average amount is, she said.
"The victims of Cash Converters on their own have not a hope of holding Cash Converters to account," Ms Nagy said. "Through the class action process we are aiming to ensure that [Cash Converters customers] get the compensation and the justice they deserve."
Cash Converters recently posted a 12 per cent increase in its full-year profit to $32.9 million. Profits from personal loans comprise the largest proportion of its business.