Editorial: Let's get tougher on loan sharks

It's good to the Government finally moving to provide a degree of protection against loan sharks.

In hard economic times, people scraping to make ends meet are particularly vulnerable to unscrupulous fringe lenders charging extortionate rates of interest.

This has been illustrated by a study showing that loan sharks were exploiting poor and desperate families with some lenders found to be targeting low income New Zealanders and charging up to 400 per cent interest.

The Bay of Plenty Times reported last week that researchers at Otago University's Wellington Medical School found that loan sharks targeted and thrived on low income families because consumers were borrowing for everyday needs.

Tauranga MP, and Consumer Affairs Minister, Simon Bridges has released a a draft of the Credit Contracts and Consumer Finance Amendment Bill.

Such a law change is long overdue and the bill takes a practical approach to a complex problem.

The bill aims to introduce tougher regulations and controls for borrowers and address the "balance of power" between lenders and borrowers to bring loan sharks into line.

Under the law change, the lender would have more obligations to the borrower than at present, including the lender being upfront and providing full disclosure of all credit terms before the borrower signed the credit agreement. The Government would also make it illegal for the lender to sign someone up to a credit contract when the repayments would result in significant financial hardship for the borrower.

The changes would add greater transparency, would require more timely and complete disclosure of loan terms, as well as extending the cooling-off period for borrowers to cancel their loan from three to five days.

For his part, Mr Bridges says the findings of the Otago University study will help him in the final drafting of the bill.

Notably the bill does not place a cap on the interest rate that loan sharks can charge which the study's authors suggested should be set at 48 per cent.

The reasoning for not doing so is that, while caps are reasonably common overseas, in many cases the cap has had to be made so high that it can hardly be said to be a deterrent to lenders and it tends to become the default rate.

In my view, a cap of 48 per cent would still be too high for most low income families.

Mr Bridge's bill places the onus on lenders to act responsibly and this will most likely be welcomed by communities in low income areas.