In a climate of increasing economic hardship where many people are seeing their incomes reduce, we need to talk about debt, particularly the cost of borrowing and how for some, that cost is too high.
The Labour-led government finally addressed the cost of borrowing by passing the Credit Contracts Legislation Amendment Act 2019. This much-needed legislation includes a cap on the total cost of credit at 100 percent of the principle, limits fees for defaulting payments to $30 and requires mobile traders and truck shops to meet responsible lending standards.
The government, prior to the election, also substantially increased funding to local budgeting services to provide more financial mentors in communities and assist people in negotiating better financial outcomes and improve their financial capability.
We celebrate that, but more is still needed to protect people from predatory lenders. Currently, much of the credit accessed by low-income Kiwis is still provided by third-tier lenders in the style of “heads I win, tails you lose” with interest charged at anywhere from 30 percent to 365 percent annually.
This is partly because the recent legislated improvements in consumer protection, and the availability of safe, fair consumer credit, have not been adequately promoted to the New Zealand public. Many of the people who need access to safe, fair credit still do not know that it is available, or where to go to apply for it. They still see themselves as having a Hobson’s choice in which only one thing is offered – taking the high-interest loan or taking nothing. And taking nothing means their power is cut off, or they have no petrol to get to work, or there is no food for the kids’ lunches.
Provider of small interest-free loans, Ngā Tāngata Microfinance with loan capital provided by Kiwbank, has turned to social media to let people know that high cost credit is not the only option when money is tight. The website has information about their small no-interest, no-fees loans and a self-test so people can see if they would qualify.
Ngā Tāngata’s general manager Natalie Vincent says: “Minister for Social Development Carmel Sepuloni and Minister for Commerce and Consumer Affairs Kris Faafoi announced on 28 July that after the first shocks of Covid-19, 74 percent of households said they were in financial difficulty or exposed to financial shocks.”
It is now October and Covid-19 continues to impact the global economy. Even before the pandemic, a survey of more than 15,000 people by the Commission for Financial Capability found that only about half were able to save regularly to ensure they had an emergency fund.
“Increasingly more people have lost working hours or lost jobs as a result of Covid. They need to stay away from the loan sharks if they are going to survive this crisis. They need to see a financial mentor, talk to Work & Income, or come to us to see if we can help,” Vincent says.
* Dr Claire Dale is and founder and chair of Ngā Tāngata Microfinance