Direct-to-consumer lending platform Save My Bacon says new legislation will almost certainly see some New Zealand payday lenders "disappear" or shrink their business.
The Credit Contracts Legislation Amendment Bill has passed its third reading in Parliament and contains measures to ensure people taking out high-cost loans never have to pay back more than twice the amount originally borrowed. It introduces a rate cap, meaning no one will have to pay more than 0.8 per cent per day in interest and fees.
Save My Bacon (SMB) director Paul Park says the company has – even before the legislation – been transforming the business away from such loans and more towards longer-term, lower-interest loans. SMB has also partnered with credit bureau Centrix to ensure their customers benefit from paying their loans on time – an advance he says is an industry game-changer.
But he says companies operating more at the "rogue" end of the industry will either stop trading or reduce their offerings when the legislation takes effect: "I think you can definitely say that the 30-day loans currently available will be uneconomic to run – because of the legislation; things will change at the very short end of the market."
The UK enacted similar legislation in 2015 and Park says there was about "a 70 per cent contraction" of payday lenders. "Before the legislation, companies making money from originally contracted revenue [no penalties applied] were running at about 60 per cent.
Afterwards, it improved to about 80 per cent. We [Save My Bacon] are already running at 97 per cent originally contracted revenue, so less than three per cent revenue comes from charges outside the contracted terms."
Park says that SMB has been working for some time to change the business and resents being called a "payday lender". Most public attention has been focused on payday lending negatives – real-life scenarios like one publicised recently, where a woman borrowed $400 for her kids' birthday presents from another online lender, agreeing to pay back twice the original amount. She missed a payment and was then caught in a debt trap which saw her trying to balance electricity bills, food bills and the repayments.
Park says the legislation will make such a scenario redundant but SMB has always had a different focus and business philosophy: "We only lend to people who have shown they can afford to make the repayments – only 27 per cent of new applicants are approved.
"We look beyond a customer's credit score, reviewing spending habits and payment records to ensure we only lend money to people who can make the repayments without suffering hardship. If they do have problems later and can't pay, we stop interest and penalties and restructure payments to a level they can afford, look at a repayment holiday and, in cases of real long-term difficulty, write loans off."
Park says the transformation of the business has seen their loan range change so that less than five per cent are 30-day loans. Their average loan term is nearing 12 months, with offerings of over 36 months being developed.
Their average customer earns $54,000 per annum and SMB does not lend to beneficiaries, he says, with loans ranging from $200-$3000 with larger limits coming on stream.
"We have interest rate caps in place to protect customers. Our longer-term products have a total cap on borrower costs set at twice the original principal amount."
The partnership with Centrix is designed to boost the transformation of SMB's business by empowering customers who, because of non-prime credit ratings, were denied loans from traditional vendors like banks.
"That affects a lot of people," he says. "MBIE figures say about 35 per cent of New Zealanders are locked out of borrowing from banks because their credit ratings have dropped too low.
"Many do not realise that late payments on credit card, power or phone accounts can damage their credit score."
A poor credit score can affect not just loan eligibility but also rental property applications, some job applications and phone and utility provision. Park says some US data shows people with poor credit can pay an extra $300,000 in interest over their lifetime.
The partnership with Centrix will see SMB customers rewarded for paying loans on time by giving them access to their credit scores and, with the right behaviour, watching them improve. Credit bureaus will be less reliant on credit card or mortgage data, he says: "This way, our customers can make their payments count."
If customers borrowing smaller amounts over shorter terms can show they had made payments as agreed, it will help improve their credit rating – empowering them and qualifying them for more or better loans.
That would, he says, disrupt the industry: ""Repayment history reported by SMB to the Centrix Credit Bureau is 96 per cent positive and should benefit those customers' credit files. This shows we are making good decisions about a customer's ability to pay, through our smart IT-driven application processes."
The new law will take full effect by April 2021, with some provisions applying in June.
For more information visit us at Savemybacon.co.nz