Living off the smell of an oily rag is all about being frugal with one's money. That means being sensible about borrowing.
Central Government is reviewing consumer credit laws, and this has awakened media interest in the scandalous payday loan industry, which has grown exponentially in recent years.
Payday loans are short-term unsecured loans of small amounts that are intended to get the borrower though to the next payday. They generally have a maximum term of a month or two. According to the websites of these lenders, the loans are typically used for groceries, power bills, vehicle breakdowns and the like. But the reality is there are probably a host of other reasons why desperate people end up at the doorstep of these usurious lenders.
The loans are usually for just a few hundred dollars. While every lender has different terms, they all have one thing in common - outrageously high interest rates, with 500 per cent per annum not unusual.
That means for every $1000 loaned, by the end of the first year they will get back $6000.
If that $6000 is then lent out at the start of year two, they will end that year with $36,000 - with $216,000 by the end of year three and with just under $1.3 million by the end of year four - all from an original investment of just $1000.
From what we can see, there's nothing illegal about what these lenders do. They don't even lurk in the shadows as one might imagine but are quite upfront and open about their terms. Payday Advance has this statement on its website: "Our Annual Interest Rates range from 520 per cent to 624 per cent per annum or approximately 1.42 per cent to 1.70 per day. Implications of non-payment - we encourage loans to be repaid in accordance with agreed dates, however in the event of a non-payment the following applies ...
"A fee of $50 applies to each missed or failed payment, a fee of $10 for each reminder letter and $10 for each week you remain in default. Default Interest - applies to any overdue amount at 104 per cent per annum. Collection practices - we will promptly contact you regarding any missed payments and we manage collection of our loans in accordance with legal requirements and industry standards ...
"Credit score implications - when/where credit scoring is used in New Zealand a repaid loan will most often positively influence your credit score. However when a missed payment, failed payment or unpaid loan occurs this is likely to negatively impact on your credit score. Renewal policy - renewals are not automatic and are available on loans (other than your first loan) where your past payment history is satisfactory to us and are subject to our discretion. A fee of $20 applies."
Handy Cash publishes this financial health warning: "This website only offers short-term loans. Short-term loans can be expensive and may not solve your money problems. There may be cheaper borrowing options and/or other assistance available to you. For example, if you are on Government benefits, ask if you can receive an advance from Winz. To decide if this product is right for you, please review our website carefully."
Cash Converters advised it has a daily rate of 1.315 per cent (480 per cent a year).
Many of the lenders say their loans are a way for borrowers to "take control of their finances". Borrowing money at 500 per cent interest rate is not taking control of your finances - it's actually digging a bigger hole and creating financial poverty.
From what we can see, the Government's review of consumer credit is mainly concerned about disclosure issues and will do nothing to alter the fact that Payday lenders can charge 500 per cent interest or more to desperate individuals.
Some may say, "Let the free market work and if people want to pay 500 per cent interest then so be it." But free-market principles are based on people acting rationally, and there's nothing rational about desperate people paying 500 per cent on a loan to pay for groceries.
If you want to have your say on the new law, public submissions will close on November 1.
Do you have a tip you would like to share? Send it to us at www.oilyrag.co.nz or write to Living Off the Smell of an Oily Rag, PO Box 984, Whangarei.