Covid has spurred consumer spending but Kiwis are also stacking up tens of thousands in personal debt, a new report shows.
A tight labour market, soaring house prices and pent up demand have increased consumer confidence in the economy.
But over that time, Kiwis have accumulated tens of thousands in personal debt, a new report by Canstar has revealed.
The financial comparison site found of the 4950 respondents, 36 percent revealed they were carrying personal debt, across credit cards, Buy Now Pay Later (BNPL), car loans and personal loans.
Of those with debt, Aucklanders are carrying a hefty $34,000, with an average of just over $23,000 across New Zealand. Kiwis in their 30s are particularly weighed down – and they’re worried about it.
More than 40 percent of the debt was accumulated over the last 12 months, and nearly 20 percent of debt-laden Kiwis say they always miss repayments. Those aged between 30 and 50 are most concerned about their debt, with the vast majority saying it is a worry for them and their families.
Reserve Bank figures show credit card spending hit $3.8 billion in May, the highest seasonally adjusted month value on record. Data on balances shows repayments have stayed steady, suggesting the debt is being managed.
But Canstar NZ general manager Jose George warns households could come under pressure as discretionary spending was impacted by rising interest rates and inflation.
Thousands of dollars could get loaded onto mortgage repayments each year, causing “a real squeeze”, he says.
“If households are also carrying large personal debt – which generally carry higher interest rates – repayments are going to hurt. Missing payments is an even greater concern, as that could attract hefty fees, along with a negative impact on credit worthiness.”
He says Kiwis are at a “crunch point” with costs starting to rise. “Kiwis who are carrying this sort of debt will need to manage it very carefully.”
The rise and rise of Buy Now Pay Later
Buy Now Pay Later makes up 19 percent of debt. And this is higher, at 28 percent, for those aged between 18 and 24 years surveyed by Canstar.
BNPL companies don’t charge interest, but they make their money from late payment fees for customers who don’t meet their weekly or fortnightly deadlines and merchant fees for offering the service.
On a spend of $100, customers using BNPL service Humm could face late fees of up to $50, half of the purchase price. Laybuy and Zip charge a maximum of $40, and Afterpay customers would face a maximum of $25, according to analysis from Finder price comparison website.
“Technically consumers are borrowing from the BNPL company who splits the cost to pay the vendor, while the customer pays them back. But in the customer’s mind they’re thinking “this is awesome, I get to pay little by little while wearing or using stuff now”.
– Tom Hartmann, Commission for Financial Capability
On the other hand, the average credit card holder would pay 19.4 percent in interest per annum. About $3 over an 8-week period, the typical BNPL repayment period.
Tom Hartmann from the Commission for Financial Capability says BNPL is popular among customers because it is interest free and seen as a payment plan rather than a loan.
“Technically consumers are borrowing from the BNPL company who splits the cost to pay the vendor, while the customer pays them back,” Hartmann says.
“But in the customer’s mind they’re thinking ‘this is awesome, I get to pay little by little while wearing or using stuff now’.”
Last year the Australian Securities and Investments Commission found missed payment fee revenue for all BNPL providers in Australia review totalled over $43 million, a growth of 38 percent.
Kiwi BNPL service provider Laybuy, alone, saw a 500 percent increase in revenue in the year to March 2021. Late fees were up 123 percent to $14.7 million on the previous year, although as a percentage of total income, late fees had reduced from 48 percent to 45 percent.
Laybuy managing director Gary Rohloff says late fees are dropping among users because of its function that suspended defaulting accounts until they pay back the money. “One of the foundations for us is to be a responsible lender. Our view is that credit is not a bad thing per se, provided it’s lent and borrowed responsibly,” Rohloff says.
The company uses credit check company Experian in the United Kingdom to check its customers, and in New Zealand is working with Centrix to do the same.
But in the UK, this is compulsory. The UK brought in regulations for BNPL service providers due to concerns over BNPL services encouraging people to spend more than they could afford.
The average purchase is about $140 through BNPL services, Rohloff says.
“Regulation is not something that we are averse to. The reality is there is no evidence of harm being caused by BNPL in the community. We’re not causing consumers harm we credit check our consumers so we’re not allowing everyone who wants to sign up to Laybuy.”
– Gary Rohloff. Laybuy
While it has taken voluntary steps like suspending accounts when debt can’t be paid to avoid spiralling, many of Laybuy’s competitors haven’t done the same, he says.
“Regulation is not something that we are averse to. The reality is there is no evidence of harm being caused by BNPL in the community. We’re not causing consumers harm we credit check our consumers so we’re not allowing everyone who wants to sign up to Laybuy.”
A lack of regulations of BNPL services has been a concern for a number of consumer protection groups.
Consumer NZ Head of research Jessica Wilson says consumers are incurring debt as a result, either through late payment fees from not being able to pay off the purchase.
“And when you’re struggling to pay other household costs, BNPL can just add to your debt. [BNPL services] have crept into the market and because they don’t charge interest they’re not currently covered by the Credit Contracts and Consumer Finance Act.”
Salvation Army national financial mentoring coordinator Paul Forster says he’s most concerned about loan affordability.
Foster says it was common for people to have multiple BNPL payments at the same time, sometimes with different companies.“We had one client with seven, another with 10 at the same time,” Forster says.
While he isn’t against BNPL services as they can offer clients to pay off big expenses like dental procedures, over time without interest, the concern is not everyone can afford to pay it back.
Forster says having multiple payments getting deducted electronically was a logistical nightmare.
“People need to be aware of what their ability to spend is when you’re using BNPL because there’s not a lot of regulation or scrutiny around them.”
– Gareth Kiernan, Infometrics
Hartmann has also heard of people with mortgage approval because of background credit checks showing multiple BNPL accounts being in use.
“Say you have three accounts with BNPL companies and you go to a bank for a loan, the bank can see credit has been offered to you and might be declined based on that even if you’re not using it but you have this limit. People don’t realise that.”
Infometrics chief forecaster Gareth Kiernan says once interest rates push up, if people don’t adjust their spending patterns then BNPL services may be the first to see defaults.
“People need to be aware of what their ability to spend is when you’re using BNPL because there’s not a lot of regulation or scrutiny around them.”
Kiernan says despite interest rates expected to rise strong spending is likely to continue over the rest of the year.
“The strong March quarter GDP numbers were made up by about 40 percent of the forced savings that occurred so if we go at that rate we’d see another six to nine months of inflated activity and once it goes beyond that – that’s when you get concerned about how sustainable that spending.”
Spending beyond that point may be driven by debt.
Jessica Wilson says as a rule of thumb anyone looking to sign up BNPL should take their time to read the contract.
“It is debt,” she emphasises. “And you really need to be confident you can make those payments. If you do get into financial difficulty get budgeting advice, don’t let the problem accumulate. Try and get to it as soon as you can.”
