Bridging the gap between those who want to borrow and those who have to
There were times when I felt distinctly uncomfortable at the government’s recent Financial Summit to discuss what should be done about loan sharks.
In my world, if I want to borrow money for something, I ask and the bank provides — at pretty low interest.
Until the summit I was only dimly aware of what it’s like for those who have to borrow, as opposed to choosing to borrow. The stories I heard that day showed, loud and clear, how the rich and middle class get richer and the poor get poorer.
Consumer Affairs Minister Simon Power started the day with a “good” one. He told of a woman who borrowed $250 from an internet payday lender. “The loan was for two weeks and with interest and fees she was due to pay back $375 from her loan of $250.” Horrors!
But that was just the start. When she couldn’t fully repay within two weeks, penalty payments kicked in. “By the time she sought help from a budget adviser — three months later — her original loan of $250 had rolled over to more than $1500,” said Power.
“Not only that, but when the budget adviser looked more closely at the contract — and she had to look very closely because it was almost illegible — she discovered an interest rate of 624% and a penalty interest rate of 104%.”
Similar tales emerged throughout the day, along with other insights into the world of loan sharks and their victims. For example:
- “Some incomes are just too low,” said one participant. “If you set up auto payments for housing and power, food becomes a residual.”
- “The problem is not financial literacy but information asymmetry,” said PSIS chief executive Girol Karacaoglu. Borrowers know much less about loans than lenders. Added Diane Robertson of Auckland City Mission, “Information is often not provided at all, sometimes because they get the loan online. Others don’t understand because of language problems.”
- Borrowers’ emphasis is on the short term. “Most only understand what’s going in and out this week,” said Robertson. Another speaker added, “People assume they will never get out of debt, so they don’t care. They only want to meet this week’s payment.”
- When the Auckland City Mission hands out food parcels, said Robertson, they look into each recipient’s financial situation. “It’s not an easy option.” She added that, “Most people come with debt. But the power bill, rent arrears etc are manageable with help.” That’s until fringe lenders get involved. “Often it starts with not being able to afford the power bill, next month they can’t afford the power bill and the loan.”
- Advertising to those without a credit history tends to emphasise the ease, speed, flexibility and normality of third-tier loans, said Power. Another speaker underlined the ease issue. While regular lenders make it hard for these people to borrow, “It’s easier to go to the loan sharks.”
What can be done? Power tells of a survey that found 35 to 40 per cent of “third-tier lenders” are not on the Financial Service Providers Register, even though they are legally obliged to be.
This led several at the summit to recommend that credit contracts with unregistered lenders be null and void. Sounds good to me. The woman in Power’s sad little saga could be told, “You owe nothing.”
Another frequently voiced recommendation was to make lenders give borrowers a one-page, easily understood information sheet about their loan.
The Ministry of Consumer Affairs is considering these and other ideas. Hopefully, that will lead to changes that reduce the huge gap between lucky us and unlucky others.
No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.
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.