NZ Herald 1 September 2018

AI am indeed interested, but sadly not shocked, as I’ve seen this before.

Part of the trouble seems to be that the mainstream banks often won’t lend to people in financial strife. As Bob Hope once said, “A bank is a place that will lend you money if you can prove that you don’t need it.”

So people who urgently need cash may have nowhere to go but firms like this — sometimes called payday lenders because borrowers hope to be able to repay the loan next payday. Unlike banks, these places often welcome borrowers with open arms, presumably because the firm can make such a big profit from them.

One problem is that borrowers may not realise that what look like small fees add up. In your relative’s case, she might have thought $18 a month in admin fees isn’t much. But as you point out, month after month it hugely adds to her effective interest rate.

What’s more, there are upfront charges. The info you sent me shows your relative paid a broker fee of $110 and other start-up fees of $336. So before she’d even started, her $3000 loan was $3,446. And if she pays off the loan early, the early payout fee is $35.

I’ve heard of New Zealand lenders who have charged what amounts to 800 per cent a year on a loan. Loans of $500 have grown to $3000, and people who have wanted to borrow $1000 have been talked into taking $2000 — at huge interest. But your example is bad enough.

And I hate the ad at the bottom of the firm’s email to your relative. It shows a picture of a young woman on a mountain looking out across a beautiful valley with lakes and mountains in the distance. It suggests wonderful times ahead. If you borrow from this firm? I don’t think so.

I’ve met people at conferences who run firms like this, and I’ve sometimes plucked up the courage to ask them how they feel about what they do. Their reply is usually along the lines of, “We help people who are often in serious difficulties. Nobody makes them come to us. They choose to borrow.”

It’s hard to argue with that. I just wish there were more lenders who operated somewhere between banks and loan sharks. They could charge more interest than banks — to take into account their extra risk — but not extortionate rates.

Actually, we might get more middle-level lenders in New Zealand if Commerce Minister Kris Faafoi gets his way. He has been talking for some time about capping interest rates, and the Ministry for Business, Innovation and Employment (MBIE) recently sought feedback on a review of New Zealand’s consumer credit legislation. The MBIE paper includes proposed caps on interest rates and fees, and higher penalties for irresponsible lending.

Interest rate caps are appealing, but they’re not a cure-all. They are used in many countries, but critics say they simply make credit unavailable for some high-risk borrowers, who end up borrowing from illegal operators or perhaps committing crimes to get cash. It will be interesting to see what happens in New Zealand.

In the meantime, good on you for “rescuing” your relative. I hope she can set things up so she doesn’t get into the same situation again. You might want to make a condition of your help that she goes to the National Building Financial Capability Charitable Trust, which is in the process of changing its name to FinCap.

This organization offers free help for people in financial difficulties. As it says on the website, www.fincap.org.nz, “Budgeting services offer free, confidential budgeting advice. With a financial mentor, you can create a plan to get out of debt, save money and start building a future for you and your family.”

Other readers may want to use this service too. It operates in many parts of New Zealand.

ASounds as if you’ve learnt some tough lessons. But thank goodness you’ve still got your home, and you’re able to keep working until you can get rid of that mortgage.

Your question is one that faces many people: is it better to get rid of debt or keep investments — or in some situations add to your investments.

Sometimes the question comes in this form: “Should I put extra savings into paying down my mortgage or into KiwiSaver — given that I’m already contributing enough to KiwiSaver to get the maximum tax credit and employer contributions?”

It boils down to which is higher:

• The return you earn in KiwiSaver, after fees and tax.
• The interest rate you pay on your mortgage.

The only trouble is we don’t know the future KiwiSaver return. We can look at how well your fund has been doing lately, but from here on it might do better or it might do worse.

Because of this uncertainty, I usually favour paying down the mortgage. It’s the equivalent of having a risk-free investment that pays you whatever the mortgage interest rate is. That’s a pretty good deal — and will get better if mortgage rates rise.

Once you’ve paid the mortgage off, though, I urge you to divert what was going on the mortgage into KiwiSaver — at least until 2022.

By the way, the idea of buying out of Auckland is a good one for many people. But I suggest you rent out your home and rent in the new place for maybe six months or a year to make sure you like the shift. I know some people who have regretted it.

AI don’t think that’s necessary. In KiwiSaver, you’re not investing in the provider itself. Instead, your provider puts your money in a wide range of external investments, and a separate supervisor makes sure the money goes where the provider says it goes.

What’s more, the Financial Markets Authority keeps an eye on both the provider and the supervisor.

If a provider got into financial difficulties, that shouldn’t affect members. Their accounts would be moved to a different provider, with all the money still in them.

Having said that, the government doesn’t guarantee KiwiSaver. So it’s not impossible that investors could lose money through skullduggery. Still, that seems highly unlikely.

AFirstly, well done for reviewing your KiwiSaver investments — in particular, the fees. I wish more people would do that.

Also, well done for both being in growth funds. Unless you’re planning a first home withdrawal, you have more than 20 years before you’re likely to withdraw your money. And in a growth fund, over that period, you’re almost certain to do better than in a lower-risk fund, despite ups and downs on the way.

You’ll see from the above Q&A that I don’t think it’s a worry for both of you to be with the same provider.

I’m not totally convinced, though, that you’ve done quite the right research. Looking at how well KiwiSaver funds have performed in the past is not helpful.

Research shows that whatever has done well can easily turn around and perform badly. In fact some research says that’s more likely. The funds that shine tend to be funds whose managers have taken more risk than average. And they are also the ones that can come a cropper sometimes.

On the other hand, it’s good that you’ve taken note of the fees your two funds charge.

I suggest you use another tool on www.sorted.org.nz, along with the KiwiSaver fees calculator. It’s the KiwiSaver Fund Finder. That will show you which funds, out of all the growth funds, have the lowest fees.

Check out the information on a few of the lowest, and consider moving to one of those.