Budget Advice clients have borrowed millions of dollars more in the last three years as the cost of living hammers household budgets. And some are forgoing food and rent to keep up with loan repayments, one adviser says.
But there are steps budget advisers say can be taken to get on top of debt - including factors to consider before borrowing money in the first place.
Advisers say it’s essential people understand what they are signing up for and make a repayment plan, making repayments a priority even if things go wrong.
They recommend only taking on one loan at a time, and making repayments on time. They also recommend spending plans include repaying debt as quickly as possible, prioritising repaying high-interest debt and considering rolling any high-interest debt into a lower-interest loan to save on interest.
Bay Financial Mentors manager Shirley McCombe said total client debt had increased by $27.1 million in three years and sat at $78,765,447 in 2022.
“It is not unusual for us to see clients who have purchased a car that is no longer road-worthy, and they still owe twice the cost of the value of the vehicle.”
She said people “frequently” entered into loans without understanding the full financial impacts because they were “so desperate”.
It was common to see clients who borrowed money they could not afford to pay back, especially on vehicles.
However, changes to the Credit Contracts and Consumer Finance Act (CCCFA) and the Responsible Lending Code had helped.
The Act requires lenders to make reasonable inquiries before entering into an agreement to be satisfied the borrower would likely make the payments without suffering substantial hardship.
She said the team “regularly” made complaints when a client presented with a loan they believed did not meet the standard.
McCombe said people were using ‘buy now, pay later’ (BNPL) schemes for food, alcohol, and period products.
She said the “ease and availability” of BNPL meant people could become over-committed and unable to meet payments.
“We’ve seen clients with 15 or more BNPL purchases - they may have committed to $300 or $400 per week of repayments that they cannot afford.”
When this happens, things like food and rent “have to give”.
She said it “can quickly become a nightmare” for those on low incomes who have “very little choice”.
McCombe believed the increasingly popular BNPL needed to be further regulated to protect the “most vulnerable”.
Financial mentoring service FinCap reports that a rising number of Kiwis in debt also have BNPL credit and the sector is set to be regulated.
McCombe’s comments come as more people fall behind on loans and the cost of living rises. According to the Retirement Commission, 11.9 per cent of Kiwis are now in arrears on loans.
It also follows NZME’s broadened coverage of the cost of living crisis looking at how skyrocketing costs are impacting all of us, and seeking advice from experts and locals on how to manage your finances through these tough times.
In the year to December, the cost of living increased by 8.2 per cent, while the net average wage rose 6.24 per cent.
Rents and mortgage interest rates are also rising.
Retirement Commission personal finance lead Tom Hartmann said, anecdotally, people were retiring with more debt than they could handle.
He said a key concern was difficulty servicing loans after income dropped significantly upon retirement.
“Even if they are able to access their retirement savings, such as KiwiSaver, we are concerned that too much of that is hoovered up by past borrowing.”
He said people were falling behind on car loans, and there was an increase in late mortgage repayments, unsecured personal loans, credit cards and BNPL accounts.
While there have been steps in regulating BNPL, there was still a concern as people could borrow on multiple platforms, taking on “much more” debt than they could handle.
Commerce Commission credit general manager Louise Unger said the commission had received 29 complaints New Zealand-wide since July about lenders failing to make reasonable inquiries to assess that loans are suitable and affordable.
She said BNPL services were not covered by the CCCFA and the commission was not assessing or investigating any BNPL services under that Act or the Fair Trading Act.
In December, the Ministry of Business, Innovation and Employment began consultation on draft regulations bringing BNPL loans under the CCCFA as consumer credit contracts.
Once these regulations come into effect, the commission would be able to investigate BNPL lenders for potential breaches of disclosure, fees, responsible lending or other CCCFA obligations. A start date has not been announced.
“We understand that cost of living pressures are rising, which can drive increased demand for loans, whether through banks or alternative lenders,” Unger said.
She said it was important consumers knew their rights when it came to loans.
Lenders were obligated to help borrowers understand the loan contract, including all associated fees, she said.
She said financial mentoring services provided free help with money management and debt-related problems and can work with lenders on behalf of borrowers.
If a borrower believed their lender had breached the CCCFA, they should first raise their concerns with the lender. They also had access to a dispute resolution service.
Getting a loan:
Already have a loan:
All of the above, and;
- Source: Tauranga and Rotorua Budget Advisory Services