Get Sorted: Capping loan sharks

The coming crackdown on mobile lenders should help us from spiralling into crippling debt. Photo / 123RF

COMMENT: Obstacle courses are pretty good fun for the whanau. Kids and adults alike get into exercises like building and crossing bridges together, aiming to avoid "falling into the lava".

If the course is clever, there's a fair bit of puzzle-solving that gets everyone's minds lighting up like a Christmas tree.

We were undertaking an obstacle course at a family reunion that was quite tricky: stepping in a line through a grid of knee-high ropes which had tiny bells strung on them.

If any of the bells rang, it was back to square one for everyone. It might as well have been electric fencing.

Out of the blue my kid brother said, "For the kids it's about not getting zapped or falling into the lava, but for grownups it's all about not falling into crippling debt."

Whoa. His surprising words rang true on so many levels. Debt can indeed be crippling, and if you've ever been "zapped" yourself – gotten into trouble and had to borrow in a hurry – you'll have an insight into bad it can become.

High time for a crackdown

Payday loans are particularly offensive – with some interest rates at more than 600% on an annual basis, which is nosebleed territory. "Punch in the face" nosebleed territory, actually. Mates' rates please!

Why take such a horrible deal? When families or individuals have an emergency without savings to fall back on, it suddenly becomes urgent to deal with the problem no matter what. If there are no alternatives other than borrowing, we take the loan and hope we can pay it back later.

This is an extremely vulnerable position to be in, and some lenders take advantage. The rates, the fees, the penalties if it all goes pear-shaped: these are real-life "zaps" that are downright shocking.

Which is why the recently announced government crackdown on loan sharks and truck shops is such a step in the right direction. Here are some of the coming changes:

Interest rates will have limits

You will never end up paying more than 100 per cent for borrowing. So if you borrow $300, the maximum you will ever pay back in total will be $600, after all the interest and fees are added on.

That's an improvement on 600 per cent, but it could be better – I've discovered the Netherlands has instituted interest-rate caps of just 14 per cent. Maybe someday…

There'll be higher professional standards for lenders

They won't be letting just anyone lend money anymore, with a "fit and proper person" test being introduced to cut out the predators. This includes payday lenders and the truck shops that swoop into neighbourhoods to prey on vulnerable people.

"Do not knock" stickers will be more powerful

These stickers will have more legal clout when you use them to keep floggers from coming to your home to cajole and bully you into signing up for bad deals.

The government also plans to step up the enforcement and increase the fines for those who break the law. These improvements look set to become part of the Kiwi landscape, hopefully by 2020.

While some of us may still fall into the lava, we should be more protected from getting zapped by crippling debt. Tread carefully – it's an obstacle course out there!

- Get Sorted is written by Sorted's resident blogger, Tom Hartmann (@TomHartmannNZ). Check out the guides and tools from Sorted – brought to you by the Commission for Financial Capability – at sorted.org.nz.