The good news on debt

Central Leader - - OPINION -

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.

Rung

two:

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.

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