Desperate Auckland families are falling prey to fringe lenders who can charge as much interest as they want. And despite horror stories, the Government won't cap loan rates. Rowena Orejana investigates.
Manase (not his real name) needed $3200 to repair the family car. With five children aged under 13, the car was a necessity, not a luxury.
He took out a $3500 loan with a fringe lender in Otahuhu, putting up his car, valued at $4500, and two cultural mats that had been in his family for more than 80 years, against the debt.
So how did he end up owing $9800? The interest rate on his loan amounted to 55 per cent over two years and it kept compounding.
New Zealand is one of the few developed countries that has not put a limit on interest rates. This allows lenders to legally impose exorbitant rates, commonly between eight and 15 per cent, that compound into 2000 to 3000 per cent over time.
Research by the Ministry of Consumer Affairs in 2007 showed 185 fringe lending companies operating in New Zealand, 71 in Auckland - most of them concentrated in South Auckland.
People like Manase, who have no access to traditional credit, succumb to the attraction of fringe lenders. "In my 10 years of experience in these communities, I see how vulnerable the families are. Most people that are desperate will sign almost any agreement," says Darryl Evans, chief executive of Mangere Budgeting & Family Support Services.
Consumer Affairs Minister Heather Roy is firmly against interest rate restrictions. "History has shown ... that price control does not work and usually causes worse market distortions - most often having a negative affect on those in lower socio-economic groups," she says.
Andrew Shann, who did a research paper on payday lenders for his Master of Laws, says that's not exactly correct.
"Many other Western/developed countries have successfully implemented such restrictions. Others are in the process of implementing them," he says.
Australia, for one, has three states already capping interest rates. Its federal government plans to assume responsibility for regulating consumer credit from state and territory governments and is looking into imposing an interest rate cap.
New Zealand's Ministry of Social Development condemns the practice.
Because it's legal to impose extortionist rates, very few loan sharks are prosecuted successfully for poor practices.
Labour MP Charles Chauvel's bill, which would impose an interest rate ceiling, has been languishing in Parliament and recently was picked up again by his colleague Carol Beaumont. However, it looks unlikely to pass while the National Government opposes it.
In the meantime, the lender has repossessed Manase's car, leaving Manase to pay for towing it away and storing it. He wants his mats back, but the company refuses to return them until the loan is paid in full.
He still owes the fringe lender just under $10,000 and the case is still not resolved.
On the fringe
Where are the fringe lenders in Auckland?
Manukau: 23%
Otahuhu: 14%
North Shore: 14%
West Auckland: 8%
World view
Country: Interest Rate Restriction
New Zealand: none
United Kingdom: none
Australia: looking at nationwide cap
- Victoria: 48%
- NSW: 48%
- ACT: 48%
United States: looking at 36% nationwide cap
- Ohio: 28%
- New Hampshire: 36%
- Oregon: 36%
Germany: 20%
Japan: 18%
Ireland: 200% (yes, 200%)
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