The good news on debt
Usually when it comes to a big corporation doing something ‘‘good’’, I have a tendency to turn a blind eye.
The way I see it is they have big marketing budgets to promote their good works so they don’t need my praise.
But I’m inspired that Bank of New Zealand will set aside $10 million to fund a five-year low and no interest loan scheme for low income people, accessed through the likes of The Salvation Army. Even for a bank, $10m is not chump change but most importantly it looks like BNZ is following what its parent National Australia Bank did in Australia, beginning back in 2003. There NAB has committed A$130m to the no and low interest loan scheme in a bid to reduce the numbers of the ‘‘financially excluded’’ who have no access to reasonably priced credit.
We have a similar financial exclusion problem here, so it is nice to see someone having a crack at breaking cycles of highinterest debt dependency with a view to helping more people join the mass of us in the finance mainstream.
I tend to think there are seven rungs on the borrowing ladder and the luckiest, best paid and best organised of us do not have to look beyond the first four.
If we do, there’s a good chance we are making poor financial choices.
Rung one: Loans from family. Interest rates are usually 0 per cent. Loans between family members are a time-honoured form of finance and allow family members to show their love, duty and concern for each other. I’ll extend family to include your boss because a surprising number of people get advances on wages to help them get through a crunch.
At the middle to upper end of the market they will tend to be loans from the Banco de Mum and Dad. These are often ‘‘development’’ loans to help establish the kids. Emergency loans to help loved ones in a financial crisis are made at all levels of society.
Mortgage debt. Interest rates of between 5.5 per cent and 8.5 per cent, though rates vary over time. This is largely positive debt, though mortgages are risky things. We’re a long way from Ireland, where roughly one in five mortgages is in default, but bad things can happen to good borrowers.
Rung three: Personal loans at banks, building societies and credit unions, 11.95 per cent to 22 per cent. They are an expensive way to buy things but have repayment schedules so debt does not hang about, and while fees are not minimal, credit insurance is relatively cheap.
Rung four: Credit cards. Interest rates vary from 0 per cent (if you pay off debt in the interest-free period) to more than 20 per cent. Minimum repayments are so low, debt can hang around for a long, long, time. Credit cards are easy to abuse, because they provide untapped finance you can use at any time.
Rung five: pany debt. Finance com
Fees and insurance are costly, and these are debts incurred too often during moments when borrowers’ eyes are firmly on something else: That lovely car, the wonderful new widescreen TV or the need to replace a broken appliance. A cycle of this kind of debt is like an extra tax on the poor.
Rung six: Payday lenders. Interest rates run to hundreds of per cent. These offer short-term loans to get people through to their next payday. A cycle of this kind of debt would be ruinous.
Rung seven: Loan sharks. These are desperation loans to people who need the cash and feel they have no other choice. Interest rates are not published.
I hope that in time the no and low interest scheme does begin to reduce reliance on those bottom two levels.