Debt valley
Susan Edmunds looks at five factors to consider before taking out a personal loan.
Aloan for a car, a hirepurchase agreement for a laptop – it’s easy to quickly get into debt on consumer items. Reserve Bank data shows New Zealanders had $16.09 billion in consumer loans in January, up from $15.4b the same time the year before, an increase of almost 5 per cent.
But unless it’s handled well, consumer debt can quickly become a problem.
The interest rates charged are much higher than on home loans – often between 14 per cent and
23 per cent from mainstream lenders, depending on the borrower’s credit history and whether they are offering security on the deal.
The Commerce Commission recommends borrowers take the time to consider all the possible ways they could borrow the money, and fully understand what they are getting into.
‘‘Make sure you do some research to get the best deal for yourself. For example, you need to look at interest rates and default interest rates, credit fees, the total amount you’ll pay over a loan term, and how long the term is,’’ a spokesman said.
‘‘New credit laws have made it easier to shop around for the best deal when you are looking for credit. All lenders are now required to display their standard loan contracts and the cost of borrowing on their websites and at their place of business.
‘‘You can ask for this and it must be given immediately and free of charge. This allows you to compare interest rates, and other costs like default fees, before you sign on the dotted line.’’
If you have a good credit history, you should be able to take your pick of lenders. There are finance companies, banks and peer-to-peer platforms to choose from.
Those with a home loan could tap into that equity, although it is important to structure new lending so it is paid off quickly, not over the life of the mortgage.
But Susan Taylor, chief executive of Financial Services Complaints Ltd, which handles complaints about financial services providers, said it was worth considering whether borrowing was the only way.
‘‘If you want to buy something that’s not urgent, it may be better putting money aside to save up to buy that item, without having to borrow.’’
Read before you sign
It sounds simple, but many people do not read the paperwork a lender provides.
Taylor said it was important that people understood any fees that would apply, including default fees, and what would happen if they missed a payment.
A lender should go through this with you and make it clear. The Commerce Commission said highcost short-term loans in particular could spiral out of control when a payment was missed and default fees were added.
‘‘They can only charge you the fees they have disclosed, and all fees must relate to the actual costs incurred.’’
In one case Taylor’s office dealt with, a borrower had a $175 loan. She was repaying it at $55 a week for eight weeks, or a total of $440.
But whenever she missed a payment she was charged $49 as a dishonour fee and $30 for a ‘‘letter fee’’. After FSCL investigated, the borrower was eventually let off the $590 balance on the loan, after repaying $330.
Once you have signed an agreement, you have five days to cancel. You will need to return any money you have been given.
Know the interest rate
Borrowers often focus on what they have to pay each week and forget the total interest cost of the loan. Your lender needs to make the interest charge clear to you.
A lower weekly repayment over a longer period of time is not always a better deal than a shorter term with higher repayments.
Whatever your repayment is, it should fit comfortably into your budget.
Get in touch if trouble looms
If there’s any risk that you might not make the payments on your loan, let your lender know as soon as possible. Taylor said it was possible in some cases to make a hardship application to reduce or suspend payments for a time.
Lenders have an obligation not to let you get into strife.
The Credit Contracts and Consumer Finance Act 2003 introduced lender responsibility principles. The new law applies to all consumer credit contracts entered into from June 2015.
The new rules require lenders to make reasonable inquiries to ensure the loans they provide are affordable, suitable and to assist the borrower to understand them.
Lenders must assess your ability to repay the loan at the outset, and be reasonably satisfied that repayments won’t mean you suffer ‘‘substantial hardship’’.
The law now requires all lenders offering consumer credit to be registered on the Financial Services Providers Register and belong to a disputes resolution scheme.
If you have a dispute and are getting nowhere with the lender, you can take the matter to their scheme to sort it out.
Secured or unsecured?
If you offer something as security on your loan, it usually means you get a better interest rate.
But it means the lender may have the right to take it if you cannot pay.
It is important to understand what you are agreeing to.
If the contract doesn’t say they can take it, they can’t.
The new rules now make it illegal for lenders to take security over certain essential household goods such as beds, heaters, washing machines and cooking equipment, unless the money you borrowed was to buy those items.
Lenders must specifically list the goods they use for security in the contract or, if you agree to give something as security later on after you have signed the contract, the lender must confirm that in writing.
Lenders can’t use a dragnet clause like ‘‘all present and after acquired property’’ to repossess all your stuff.
Some payday lenders include a wage assignment authority with their contracts. This means they can ask your employer to take your loan repayment directly from your pay if you have signed the authority as part of the contract.
Some lenders say these authorities are ‘‘irrevocable’’ – they can’t be cancelled. That is misleading. You can cancel the authority, but if you do you may be breaching the loan contract. Talk to your lender about this.
You need to look at interest rates and default interest rates, credit fees, the total amount you’ll pay over a loan term, and how long the term is.