KEY POINTS:
A proposal to cap interest rates on loan sharks' lending has been squashed by the Government.
An Auckland University report on South Auckland "fringe lenders", commissioned by the Ministry of Consumer Affairs, has found that community law centres, budgeters and other local agencies want interest rates controlled by
law, as in Australia.
Interest on car loans often ranges from 30 to 35 per cent, and short-term cash loans until next payday are advertised online at 10 per cent interest a week, or 520 per cent a year.
Interest rates are capped by law at a maximum of 48 per cent in New South Wales, Victoria and Canberra.
Caps are also in force in Japan (18 per cent), Germany (20 per cent) and Ireland (200 per cent).
But Consumer Affairs Minister Judith Tizard said yesterday she had rejected a cap because overseas experience showed it did not work.
"If you set the level too low, you drive ethical funders out of the market. If you set it too high, that becomes the ruling rate."
Consumer Affairs Ministry head Liz McPherson said caps drove loan shark lending underground.
"We want to make sure it's above ground where we can see it and the Commerce Commission can see it. We are not closing the door to it [a cap], but we are saying at this point in time we don't believe it's something to be pursued. But we will continue to monitor it and include that in the review of the Credit Contracts and Consumer Finance Act."
The report by Dr Melani Anae and Dr Eve Coxon of Auckland University's Centre for Pacific Studies is based on focus groups involving 94 South Auckland Pacific Islanders and in-depth interviews with 50 Pacific borrowers and 12 "key informants" from law centres and social agencies.
It was finished in March, but an April 7 launch was cancelled to give the Government time to respond.
The report found that most Pacific borrowers could not or did not read their loan contracts and that loans often rose disproportionately because of default fees of up to 35 per cent for a missed payment.
Many were signing up for unnecessary insurance and "iniquitous fees such as administration fees, handling fees, contract fees, etc".
Although the law allows borrowers to cancel a loan contract within three days, car dealers were encouraging buyers to take the car home for a weekend "test drive".
Someone who accepts a "test drive" is deemed to have taken possession of the vehicle, so the contract cannot be cancelled.
Apart from capping interest rates, the people interviewed called for extending the three-day cancellation period to 30 days, a ban on loan shark advertising similar to the ban on cigarette advertising, public advertising to promote budgeting agencies and law centres, and limits on how much could be lent to a household.
One law centre lawyer suggested reviving the old hire purchase laws which prohibited lending that pushed a household's total debt servicing costs over 30 per cent of its income.
The Government has not taken up any of these proposals.
But a 27-page official response, released in Otahuhu yesterday, said the Commerce Commission would take test cases to court to establish what constitute "unreasonable" default fees and other charges.
The Government has produced a "True Cost" guide to help people to work out the true cost of car loans and is distributing 67,000 copies to South Auckland households this weekend.
www.consumeraffairs.govt.nz/policylawresearch/research/pacific-consumers
Loan shark report
Recommendations
* Cap interest rates.
* Extend time to cancel a loan from three days to 30 days.
* Ban loan shark advertising.
* Expand public advertising of budget agencies and law centres.
* Limit lending to keep repayments below a reasonable share of household income.
Government response
* Commerce Commission to take court cases to establish "unreasonable" fees.
* Loan cancellation period unchanged.
* Advertising Standards Authority to consider guidelines for loan advertising.
* "True Cost" guide to car loans distributed to 67,000 South Auckland homes this weekend.