Poverty-busting scheme gets the wheels in motion
Loans at manageable interest rates are life-changing on struggle street, writes Rob Stock.
Aayla Peebles pays 6.99 per cent interest on her car loan. That she’s not paying 30 per cent or more is thanks to the Step Up loan scheme which passed its $2 million milestone in loans made through the Salvation Army and Good Shepherd charities.
Step Up loans are low-interest loans designed to break the cycle of high-interest debt that can make it all-but-impossible for people to get their money lives permanently out of the red and into the black.
The capital for loans comes from BNZ, the operational funding to lend them comes from the Government.
That’s why the interest rate is so low compared to what banks and finance companies charge.
Peebles had a tough start in life in a benefit-dependent family living in state housing.
She is 25 now, but at 15 she dropped out of school.
Pregnant, and in an unhealthy relationship that’s now long over, she found herself unemployed and apparently unemployable.
Five years ago, however, she embarked on a remarkable transformation.
She’s close to completing a degree in applied management at MIT, juggling study with family life, shifts in a South Auckland budgeting agency, and weekend work at a golf club.
The budgeting work is rewarding, but working at the golf club gave her a glimpse of a better life. The golf club members had nice cars, houses of their own, good jobs.
‘‘I really wanted that,’’ she says. ‘‘I looked at my kids and thought, ‘We have got to be something different’.’’
At the budgeting agency, Peebles specialises in working with people with particularly challenging lives, including those with mental illness.
‘‘It’s good to see the results. We have only taken on mental health patients in the last year, and we have already seen dramatic changes to their lives,’’ she says.
She went into budgeting to share the skills she now relies on to manage as she transforms her life, but she adds that being a budgeter who has ‘‘lived the struggle’’ makes it easier to connect with clients, and be effective.
By the time Peebles turned 20, she was mired in debt, and her credit record was stained with black marks. People in this situation end up paying through the nose to finance assets such as cars – and without a vehicle, it’s a struggle to work and raise a family in big cities like Auckland.
Following around $600 of repairs to her car, Peebles realised she needed a newer vehicle.
‘‘I needed to invest in a nicer car that was easier to maintain,’’ she says.
Buying or repairing cars are the most common reasons for people to seek a Step Up loan, says BNZ’s Frances Ronowicz.
All loan applications begin with a referral from a budgeting agency.
Often it’s the only alternative to borrowing the money on the market at ruinously high interest rates, fraught with financial peril, not to mention big up-front application fees, and pressure to take expensive repayment insurance.
‘‘My credit would be worth a personal loan of 25-30 per cent,’’ Peebles says.
The Step Up loans are available to some people with spotty credit records, but they can’t be feckless.
‘‘It’s like a second chance,’’ says Peebles. ‘‘The majority of people we assist in getting loans have had trouble in the past. It’s like a cloud that’s held over them.’’
The second chance is not being squandered, says Ronowicz.
The default rate on the Step Up Loans is equal to that of BNZ’s ordinary personal loans.
As the money is BNZ’s, any loans not repaid are a loss to the bank.
Part of the reason for the low default rates is that Step Up loans come with strings attached. To qualify, borrowers must work with budgeters to build their financial capability.
It means that borrowers, whom banks like BNZ would normally turn away, may qualify for a Step Up loan.
‘‘They will consider the situation as a whole as opposed to just looking at your past,’’ Peebles says.
Fleur Howard from Good Shepherd says: ‘‘The conversations that happen as a part of the loan process help strengthen people’s financial understanding and the loans increase the wellbeing of families and communities by enabling change. People grow in confidence and learn how to look at their budget critically.’’
But not everybody qualifies. Responsible lending laws still apply.
‘‘Perhaps they get a loan, or sometimes they go away and sort out some of their debt, then return to us for a loan when they’re in a better financial position,’’ says Howard.
The loans give budgeters added ability to help clients.
‘‘We estimate that the $2m of lending has saved clients more than $1.103m in interest and charges when compared to borrowing the same amount through predatory lenders,’’ Ronowicz says.
Many people have family to fall back on during a tough spell.
The Step Up loans give people like Peebles something similar.
‘‘I don’t have the support that many other New Zealanders have,’’ she says.
So far there’s been 825 families like Peebles’ helped with Step Up loans.
BNZ has earmarked $16m to lend, but it will be a few years (government funding permitted) before anything like that amount has been lent through partners in Auckland, Wellington, Christchurch , Whangerei, Hamilton, Tauranga, Rotorua, Palmerston North and Invercargill.
‘‘I’m in the process of putting together a plan for how we get to the next level,’’ says Ronowicz.
Peebles’ plan is closer to fruition.
She’s within three months of finishing the degree.
And though she has $18,000 of student debt, the future is looking a great deal brighter for her and her children.
Her plan is to build a career in the not-for-profit sector helping others turn their lives around.