Let’s educate our way out of 500%+ loans
When I first saw “Annual interest rate 547.50%” on a New Zealand website offering loans, I thought there’d been a mistake. But no. That’s the rate for a small, short-term cash loan from www.savemybacon.co.nz.
Don’t worry, though, the website assures us. This is “Not the same as actual interest charged — find out more”.
The further information points out, firstly, that “We aren’t actually obliged to show (the annual interest rate) on our website, but we’re upfront.” Let’s give them credit for that.
It then says that the annual interest rate “is an annualised measure that wasn’t devised with Save My Bacon small and urgent loans in mind. Why is this? Our loans only have a maximum term of 31 days and we do not offer a long-term loan product for a year. You can’t actually borrow from us for a year!”
Oh, so that makes it okay?
The website’s short-term rates are still huge. The calculator tells me that if I borrow $100 and pay it back over four weeks, I will repay a total of $182.40. The loan is almost doubled over less than a month. Makes credit cards look dirt cheap!
I acknowledge two things:
- This loan provider is far from unique. Google “payday loans” and up come several websites. While some give a daily interest rate on their home page, all give the annual rate somewhere. The ones I saw ranged from 438 to 780 per cent — all outrageous.
- These businesses need to be compensated for the risks they take. But given that: an applicant to Save My Bacon has to be permanently employed with take-home pay of more than $400 a week; payments are set up as direct debits; and the maximum loan is $500, it doesn’t sound all that risky.
Almost as surprising as the interest rates are the proclamations on many of the websites that they are “responsible lenders”.
That rings a bell. At a recent meeting to explain the proposed Credit Contracts and Consumer Finance Amendment Bill, newish Minister of Consumer Affairs Simon Bridges said the bill introduces the concept of responsible lending, which is “quite radical”.
Currently, the relationship between lender and borrower is at arms length — “Let the buyer beware”, said Bridges. But under the proposed changes, “the lender has to check the borrower’s circumstances.” Added an official, “The lender can’t just say the borrower shouldn’t have taken the loan out.”
Will that curb payday lenders? Perhaps not, if they are already using responsible lending practices.
What would cramp their style would be a cap on finance charges — interest and fees. Australia and some other countries have such caps.
But that is not proposed for New Zealand. With a cap, says the Ministry of Consumer Affairs, “some consumers may not be able to access credit at all, or may be driven to borrow illegal credit.” It’s a tricky issue.
In the end, no matter what changes the new law brings — and I must say it looks promising — there’s no substitute for consumers understanding debt better. The fact that payday lenders stay in business while charging exorbitant interest suggests there’s lots of ignorance out there.
A testimonial on Save My Bacon’s website reads, “‘Thanks for your quick and efficient service — it’s really helped me out in quite a few bad times…’ — Getruida of Christchurch”.
Well, Getruida, you might get the money fast, but if you keep up your borrowing habit you will end up way poorer.
If we can’t put high-rate lenders out of business by changing the rules, let’s do it by education, so that New Zealanders understand how impoverishing those loans are.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.