Warning: Don’t let loans ruin Christmas
Rolling over highinterest loans can lead to unbearable interest costs. By Rob Stock.
URGENT action is needed to stop payday loans companies from stealing Christmas from some of the country’s most vulnerable families, say campaigners.
With the expensive festive period upon us, some struggling families turn to high-interest loans like credit-card debt, personal loans, and even payday loans in order to give their families a day to remember.
But rescue lender Robert Choy, from Nga Tangata Microfinance, which makes zerointerest loans funded by Kiwibank to people trying to claw their way out of debt, says it’s time to take the steps to protect vulnerable borrowers.
Top of Choy’s Christmas wish-list is the hope the new Government’s consumer champion, Chris Faafoi, will prohibit ultra-highinterest, short-term payday loans from being repeatedly rolled over.
Faafoi has already committed to an interest rate/total cost cap on lending.
Currently, payday lenders, whose interest can add up to more than 365 per cent a year, sells loans with terms as short as one, or two weeks.
High costs are a result making each small loan but Choy says the dark secret of the payday lenders is that many of the loans are not paid off, and get rolled over again and again, and he urged Faafoi to act.
‘‘One of the things they have to look at is the number of times somebody can roll over a payday loan. That’s what creates the problem. Somebody with a payday loan for nine or 12 months can end up paying back three times the amount they borrowed.’’
That includes fees and penalty fees.
In Britain, payday loans can be rolled over only once, meaning lenders must be careful to lend to people who they believe can repay the loan quickly. Australia has also cracked down on payday lending.
Predatory lenders are continuously hunting for borrowers among the ranks of low-income earners, Choy says.
‘‘They are continuously being stalked by lenders.’’
But payday loans aren’t the only loans that are getting people into trouble. Other forms of highinterest debt are also getting people into trouble.
And even modest amounts of high-interest debt can be almost impossible to get out from under.
One couple, who asked not to be named, were able to get a Nga Tangata loan through a Whangerei budgeting service, in a bid to get out from under a mere $3000 of credit-card debt.
Everything seemed to be going fine for the couple until the 2011 earthquakes struck Christchurch. The couple relocated to Auckland, where costs were much higher, and slipped into debt.
‘‘It was blumin’ hard,’’ the man said. Then the man developed back problems and could not work. Suddenly, the debt was a stone around their neck pulling them under, and their income was so low they were not able to pay off more than the minimum each month.
The couple relocated again, up north to the family ‘‘homestead’’ in rural Northland, and now, two years later, are debt free, just in time, as she is 65, and he 64.
‘‘If it wasn’t for the interestfree loan, I don’t know where I would be today,’’ he said. ‘‘I’m just very grateful to them.’’
Nga Tangata Microfinance, which set up in 2010, is in expansion mode, with Kiwibank looking to put more capital into it.
It makes its loans exclusively through budget advisory services, mostly in Auckland and the North Island.
Mostly the loans are made to clear high-interest debt to people willing to commit to intensive budgeting with help from budgeters. While Kiwibank does not earn interest on its money, it does expect loans to be repaid. Choy said losses are less than 2 per cent, which is low for microfinance around the world.
More capital is needed, says Choy, as there are worrying signs that high-interest debt is capturing more households, including those higher up the income ladder.
‘‘We are finding more people in the middle-income area coming to us,’’ says Choy. ‘‘They have reasonable incomes, but high outgoings.’’
Rents, and inflation in necessities have been driving that, coupled with low wage growth, he says.