Mentors’ fears for emergency loans
Financial mentors were nervous about the Government’s plan for banks to make emergency loans to people short on money after Cyclone Gabrielle.
The Government decided to temporarily relax the tougher responsible lending laws it introduced in late 2021, so banks could make emergency loans quickly. But mentors were concerned that emergency loans of up to $10,000 could turn into long-term costly burdens for people already struggling financially.
Under pressure to do the right thing, one by one, the banks decided any emergency loans they made under the emergency rules would be interest-free.
What’s less clear is what will happen to those loans, which are only guaranteed interest-free in some cases for as little as 45 or 90 days, if they are not paid off during the relatively short time they are issued for.
Mentors fear some will end up as interest-bearing debt to the profit of the banks. One group of mentors sent some pointed criticism to the Government before the temporary relaxing of regulations took place. It called on the Government to explore other options. Instead of loans, emergency taxpayer-funded payments to people in trouble could have been made.
These would have been similar to those made to people during the first year of the Covid19 pandemic. Allowing people easy emergency access to their KiwiSaver money might also be preferable to them taking on debt, the mentors thought.
Australia let people who were badly affected by Covid lockdowns tap into their super savings. The mentors were also concerned that emergency loans could become a default option.
They feared people ending up with easy-to-get emergency loans, when they could have got grants and support from other places.
The mentors asked the Government to make banks check that people had made reasonable inquiries to ensure that all other options like KiwiSaver, Mayoral Relief
Funds, and support from Work and Income, had been tried, before a bank was allowed to make an emergency loan.
Mentors said there should also be cut-down affordability assessments before emergency loans were made, fearing some vulnerable people would end up with debts they could not repay.
They also felt banks making emergency loans should commit to terms of more than 12 months.
Short repayment timeframes meant financial pressure on people who were already struggling.
The mentors’ thoughts show some of the potential pitfalls people taking out emergency loans from banks face, but they also remind people that a range of other options are out there.
Options for people seeking to avoid taking on more debt, or limiting the amount they take on, include:
■ Seeking help from Work and Income, which can help with emergency grants for things like food, clothing, bedding, and loss of income through Civil Defence Funding.
■ Local foodbanks and cyclone relief charities are also hard at work in communities, partly funded by donations from banks.
■ Local community emergency hubs have information on help that’s available.
■ Around the country, councils have set up relief funds to which people can apply for emergency grants. Council websites carry details of the funds.
■ An emergency accommodation service is operating in Auckland.
■ People can seek expert help from financial mentors through Money Talk.
■ Banks, including ANZ, have simplified their KiwiSaver hardship withdrawal applications for amounts up to $5000 for flood and cyclone victims.
■ Banks can allow people with debts to them to temporarily reduce or suspend payments. All lenders must have hardship processes, which allow for temporarily reduced, or suspended payments.
■ Talk to your insurer. Insurance policies can pay claims quickly for claims for temporary accommodation and cash after a car has been written off.
■ Studies of past natural disasters here and overseas show money flowing between family members to help bridge gaps. Sometimes, that money has come from personal loans, or advances on wages.
■ Past surveys of debt also show that people rely heavily on their family and friends for loans.