Photo / The Aucklander

Photo / The Aucklander

The global credit crisis has tightened access to money and made low-income people even more vulnerable to loan sharks.

It is heart-breaking, week after week, in my work in South Auckland to deal with people who owe large sums of money because they have been ripped off, both in the goods they buy and by their loan contracts. My clients have always had great difficulty in obtaining loans from banks because of their low incomes, lack of jobs or job security, poor credit histories and lack of securities and guarantors.

As a result, the lowest-income people in our communities are pushed into the arms of loan sharks and other unscrupulous lenders. Those least able to afford high interest rates and excessive loan fees accordingly end up paying the largest sums for both.

However, it does not have to be like this. The Government could wipe out loan sharks overnight by taking the following 10 steps:

1. Cap interest rates - the interest rates lenders can charge should be specified by law and it should be an offence to charge more than that rate.

Maximum interest rates could be pegged to the official cash rate, inflation rate or bank interest rates and periodically reviewed. This single step would end most of the rip-offs immediately because it is the huge - and compounding - interest rates which low-income borrowers pay that cost them the most.

2. Cap loan fees - consumer law requires loan fees to be reasonable and related to the costs incurred in preparing loan documents. However, loan contracts nowadays are speedily prepared using precedents and with a few strokes on a keyboard. There is no reason why uniform fee rates cannot be set to prevent unscrupulous lenders from claiming inflated costs.

3. Make low-interest loans available through KiwiBank - borrowers could still pay interest and the lender could still earn a profit, but the interest rate would not be excessive.

4. Further simplify loan documents - credit law changes in 2005 were supposed to make contracts easier to understand, but they are still complex and contain many pages of small print. Many borrowers have no idea of how much they will pay over the life of the loan - they only understand their weekly repayment amounts. The front page of the loan document should contain nothing other than the following statement in large, bold type: "YOU WILL PAY A TOTAL OF $X IF YOU TAKE OUT THIS LOAN."

5. Introduce strict controls on insurance relating to loans - people are commonly talked into taking out loan repayment insurance covering risks which do not apply to them. An example of this is beneficiaries being signed up to insurance contracts covering them for loss of a job.