Interest rates of 800 per cent a year are hard to comprehend.
We're in a low interest rate environment — HSBC just rolled out what it said was the lowest interest rate in 50 years, of 3.85 per cent.
But there's a segment of the population that gets no benefitof that and are still routinely borrowing money with interest rates of 500 per cent or more every year. They're the people who have to resort to taking loans from payday lenders.
These lenders operate on the promise of a few hundred dollars to "tide you over" until next payday. They say they have to charge rates that would seem exorbitant elsewhere because the loan terms are so short.
But at rates so high, it doesn't take long for the borrowing to get seriously out of control — and these are the people who have the least capacity to deal with that.
Unless you're sure that you will have more money next payday to repay the debt, you end up struggling to pay it, or refinancing it within another loan and getting into a horrible downward spiral of debt.
There's been reluctance to set an interest rate cap, in part because it might create a target for lenders to aim at.
But a review by the Commerce Commission recently found a lender charging 800 per cent.
That means someone who borrowed $100 would pay $8000 a year for it.
This cannot be part of a well-functioning financial system. If people are getting into such trouble that they need these loans, we need to find ways to help boost financial literacy.
People need to know that when they take a loan they must find out the total amount they'll pay and the interest rate — not just the repayments that the lender tells them.
This is a sector that needs more attention. Interest rates so high are simply setting people up to fail when at their most vulnerable.
Jeremy Tauri is an associate at Plus Chartered Accountants.
