A wage earner needed funds urgently but was already at her credit limit with her bank, so accessed a payday loan for $500. She struggled to meet the repayments so accessed a different online loan to help pay the first loan. Within a month she had four online loans and was scrambling to borrow from Peter to pay Paul. The total amount borrowed was $1700, the total amount still owing after six weeks was $2713 and she had already paid $800 over that time. It was decided she stop payments altogether and file for an insolvency procedure. This Taupō case study is just one situation a new government bill aims to prevent.
The Tauranga Budget Advisory Service is among dozens of budgeting organisations across the country hoping new legislation will restrain high-interest lenders.
In the past year, the free Tauranga service has helped 2255 clients, with a total debt of $25,900,000.
This included individuals and families from Pāpāmoa, Maketū and Katikati.
Service manager Shirley McCombe told the Bay of Plenty Times: "We need to approach this [debt] challenge from both sides.
"We need to legislate to protect the consumer and we need to provide education, ideally before people obtain their first job. Budgeting organisations such as ours, provide education to help people to make informed decisions."
The Credit Contracts Legislation Amendment Bill aims to protect vulnerable Kiwis by tightening the rules on who lenders can lend to, putting a cap on interest and fees for high-interest loans and upping penalties for lenders who don't comply.
The bill passed its first reading in Parliament in April, was open for submissions last month, and is now the subject of a Finance and Expenditure Select Committee report due in October.
McCombe hoped the bill would reduce the number of people trapped by high-interest loans and truck shops.
These mobile traders offer everyday items at a high-interest rate to isolated communities without large, easily-accessible retailers.
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"What we see regularly is people who purchase items, particularly electronic items at hugely inflated prices from the retail trucks, then need to sell the item at a fraction of the cost to try to make the repayments," she said.
The Taupō Budget Advisory Service's submission on the bill, prepared by co-ordinator Jan Otsuka, made it clear truck shops were a major problem there too.
Credit Contracts Legislation Amendment Bill - Hearing of evidence (26 June 2019)
Hearing of submissions on the Credit Contracts Legislation Amendment Bill (26 June 2019). This bill seeks to address ongoing issues in the credit market and significant harms being done to vulnerable consumers with problem debt (that is, a level of debt they can't manage). The bill would do this by limiting the maximum amount that creditors may recover on high-interest loans. It would also place stricter requirements on people who offer loans for personal and household purposes to ensure that borrowers can afford to pay the loan back, and strengthen the penalties if they do not follow those requirements. Read more: http://bit.ly/2vulsn0Posted by Finance and Expenditure Committee on Wednesday, 26 June 2019
She provided a case study of a couple in their mid-50s who were not very literate and had signed direct debit forms for payments for appliances and technology items valued at $10,500.
"Their [the vendor's] actions were extremely predatory because they returned to this couple and sold them something new each time they came to Taupō."
McCombe said that regardless of the bill's progress, budget services would always be there "to provide non judgmental support and to walk alongside them [people in financial difficulty] so they can take back control of their finances".
Cash Converters, one of New Zealand's largest providers of small loans from $100 to $2000, also made a submission on the bill.
It has 28 branches across the country, including in Tauranga, and the company submitted that it had "a long-standing reputation for ethical conduct and the provision of responsible services in New Zealand".
It supported most of the bill's proposals, but opposed the removal of section s9C(7) of the Credit Contracts and Consumer Finance Act "which allows lenders to rely on information provided by borrowers where there is no sound reason to suspect the information is unreliable".
"We believe a repeal will drastically increase the cost and burden of the affordability assessment process, make an already intrusive process substantially more so, and ultimately exclude many borrowers from access to credit.
"We are already seeing a growing number of our customers who are either partially or completely financially excluded from obtaining credit through traditional means such as banks."