Government takes aim at loan sharks with new measures including interest-rate caps

Vulnerable people are being sucked into a spiral of debt. Photo / File

New measures to stamp out loan sharks could include caps on interest rates and fees, and increased penalties for irresponsible lending.

They are part of a raft of measures recommended to Commerce Minister Kris Faafoi, in an MBIE discussion paper reviewing the Credit Contracts and Consumer Finance Act.

The recommendations include increased licensing for lenders, and introducing "more prescriptive" requirements for affordability assessments.

Faafoi said it was becoming clear the 2015 amendments to consumer finance laws didn't go far enough, and it was now time to "finish the job" to protect the most vulnerable.

He said the recommendation to cap interest at 100 per cent of the amount they originally borrowed, seemed common sense.

"I've spoken with people who have been given loans that are clearly unaffordable for them, and others who have been lashed with huge penalties and fees.

"These practices trap people and whanau in an appalling debt spiral that is very difficult to get out of."

Faafoi said that ethical lenders and agencies such as the Salvation Army tried to help people, the laws needed to have the right settings to stop people getting into terrible situations in the first place.

"Ensuring the credit settings are right, so that people can borrow appropriately when they need to but are not dragged into a long-term debt spiral is another way we will ensure all New Zealanders benefit in a strong and inclusive economy."

Salvation Army financial mentor Damien Hazlewood said the current situation couldn't continue.

"People come in and they've had a loan for $500, and it's ballooned out to $3000, just with interest, they can never pay it off," he said.

"One case I had, they went around to a lady's house, they said would you like a loan, she said no.

"Then they sat around outside. She went to the daycare centre to drop her daughter off, and they followed her down there, and were sitting around waiting for her to come out.

"That sort of practice is just not on.

"Other clients have been texted by lenders on their birthday, saying 'hey you've got some credit, come and spend it'.

"They'll try to become your best friend."

The MBIE review said borrowers got high-cost loans for many reasons, including wanting a small loan for a short time that weren't available through mainstream lenders, not trusting mainstream lenders, wanting the independence and privacy of a loan instead of assistance from Work and Income, or being unable to get a loan elsewhere because of their credit histories.

The review also noted continued predatory behaviour from mobile shopping trucks and traders.

It said there was concern about "uninvited" sales of goods on credit, which targeted vulnerable consumers and created unaffordable debts. It noted some of those contracts were breaking the existing credit laws.

The discussion paper is now open for submissions, which close on August 1.