11 Apr 2014

Cracking down on loan sharks

2:07 pm on 11 April 2014

Money had been very tight for Adam* since he’d lost his manufacturing job in Auckland. So, when his car needed repairs, in about July 2013, he took out a $1,000 personal loan with a finance company to help cover it.

“Just getting it up to scratch for a warrant,” he says. “My daughter’s asthmatic and if I don’t have a car and she gets an attack, I don’t really want to have to call an ambulance. I’ve got to have a vehicle.”

It proved a deceptively simple solution. He can’t remember the exact interest rate but, after an establishment fee and late payment fees, he says he found himself expected to repay about double the original loan amount. Trying to make ends meet, he took out two further loans of $500 and $1,000 with two different finance companies. At one point within the next six months, he found himself facing a combined debt of about $4,000.

 

“It just got to be too hard, paying them all off,” he says. “Extra charges and double the following week, so you’ve got to come up with twice the amount when you can’t even come up with the first amount."

Most New Zealanders are comfortable with the idea of borrowing to get ahead. It’s seen as acceptable, even desirable, to take out a student loan and a mortgage and to keep a credit card handy.

If you’re struggling to cover basic living costs, though, and can’t go to friends or family for support, then something as simple as a car breakdown or illness in the family can quickly lead to problem debt.

This is especially the case when borrowers turn to third-tier or fringe lenders. While some act responsibly, others take advantage of those in need. To help sort the good from the bad, the government is poised to pass sweeping changes to the Credit Contracts and Consumer Finance Act 2003. Will it go far enough?

“A loan shark is a predatory lender. A lender who wants a client for life,” Claire Dale says. She’s spent a good part of the last two decades working to tackle debt, poverty and financial literacy in New Zealand, including as part of the Child Poverty Action Group.

Child Poverty Action Group's Claire Dale: "...if we can reach people before they’re in crisis, then we will make much more of a difference to many more families."

Child Poverty Action Group's Claire Dale: "...if we can reach people before they’re in crisis, then we will make much more of a difference to many more families." Photo: Jordan Dodson

“As well as the high interest rates, there are administration charges and if they can they'll put in some insurance or something. You make a late payment then you get a penalty interest rate on top of your interest rate. There are penalties for repaying early.”

The idea, she says, is that once someone is hooked then if they fall behind, they’ll just get another loan. “You finish up with whole communities being captured,” she says. “It’s normalised. It’s normal.”

There are a few different ways to guess how many people are taking out personal loans. In 2013, the New Zealand Federation of Family Budgeting Services provided free budgeting advice to 53,760 clients. Across those clients, average debt per person was $20,565 with average arrears (overdue debt) of $3,731.

Once mortgages were removed from the data, the top three debt categories were government department obligations, at $3,300 on average per person, finance company loans at $3,136 and bank loans at $2,518.

Another proxy is to look at the number of third-tier lenders, a broad group that includes everything from finance company chains to payday lenders (small short-term loans), pawn brokers and mobile lending trucks. The latter – shops that operate from the back of trucks, selling clothes and household goods on credit – tend to be associated with low-income communities.

Overall, a 2011 Ministry of Consumer Affairs report identified 218 third-tier lenders in New Zealand, about the same number of operators but more outlets than in 2006. It concluded that lenders are seeing opportunities and increasing demand for more accessible loans not being met by banks or credit unions.

“Growth in this industry coupled with advertising which focuses on ease, speed and normality of third-tier loans is a concern,” the report continues. “Some third-tier loans are very high-cost and may pose issues for some borrowers, who are often on low incomes or are beneficiaries.”

It found that up to 40 per cent of third-tier lenders appeared to be operating illegally as unregistered financial service providers, perhaps due to a lack of awareness among small sole traders rather than any unlawful intent.

The worst she’s come across includes illegal lenders who take passports or bank cards as security and those who take out advertisements to name and shame borrowers who don’t pay back loans.

Edward Miller a strategic advisor at FIRST Union, is working on another part of the answer. In March, inspired by a similar project in the UK, he started building a map of payday lenders in New Zealand.

“I was really impressed with what they did in the UK,” he says. “They managed to narrow it down to a single sentence, which was ‘for every seven banks and building societies, there’s one payday lender’. I thought, ‘well, that’s interesting, I wonder if our statistics would be any different’.”

It’s too early to say, but Miller’s map is already telling part of a story; most payday lenders on his list are based in Auckland. “There’s a bunch of them around New Lynn, Henderson. You’ve got some around Manukau, further down Papakura...”

Several companies on the list are online only. “That’s where the growth area is,” he says. “Most people have smartphones nowadays or internet access so they can access it very quickly.”

A common interest rate among online payday lenders is about one per cent per day. That works out to an eye-watering 365 per cent per year; as loan terms tend to be capped at about four weeks, it’s effectively more like 30 per cent.

Edward Miller, FIRST Union strategic advisor: "The difference between having to wait ten days to get your pay and having three days could be the difference between going to see a payday lender and face up to exorbitant interest rates."

Edward Miller, FIRST Union strategic advisor: "The difference between having to wait ten days to get your pay and having three days could be the difference between going to see a payday lender and face up to exorbitant interest rates." Photo: Jordan Dodson

“Don’t worry! No fees and no interest on your first loan! Give it a go!” Ferratum, a global company that operates in 20 countries, offers new customers with a good credit record in New Zealand a small first loan without charging fees or interest.

After that, depending on the loan size and repayment period, it sets interest rates of between 52 and 803 per cent per year. Borrowing $100 for seven days, for example, including interest and fees, would require repayment of $129. Borrowing $1000 for 28 days would require $1,443.

Extra fees are common. HandyCash, for example, part of trans-Tasman lending group PAID International, charges an interest rate of $1 per $100 borrowed per day. It also charges an establishment fee of $45, credit fee of $8, and $1.40 for each direct debit payment. If a payment is missed, a customer may be hit with a $45 arrears management fee, a $35 late payment fee and a $10 fee for a letter to be sent out, if contact can’t be made by phone or email.

The costs seem high. But the counter view is that these lenders provide a legal, valuable last-resort service – faster than banks, smaller amounts and more accessible to lenders with poor credit history – and that they act responsibly, including by providing loan cost calculators and terms and conditions upfront.

Customers may actually be relatively affluent. Save My Bacon, which lends up to $500 for up to 31 days, has provided 100,000 loans in New Zealand since August 2010. It targets permanent employees who take home at least $400 per week, the company's CEO Kent Gillman says. “We don’t lend to beneficiaries or those on low incomes.”

He argues yearly interest rates are an unfair way to represent the cost of a short-term loan. “An annual interest rate is a useful measure for the cost of medium to long-term credit, by which I mean credit with a term in excess of 12 months,” he says.

“For short-term credit, like Save My Bacon offers, it is less useful and potentially misleading as the cost of credit is more akin to a fee for a service than a return on money lent.”

About 30 per cent of new applicants are accepted by Save My Bacon, which suggests a reasonably discerning application process. Of those, the average borrower’s take home pay is $44,000 per year, which works out to pre-tax income of about $60,000.

Just looking at a bank statement shows income, and there’s not much for food already, and they’re giving them a loan?

Save My Bacon declined to say how many customers successfully pay back loans, citing commercial sensitivity. Gillman did note that the company offers “extended periods of grace” for customers to catch-up on payments and, in the case of financial hardship, allows a repayment extension with interest “turned off” after 45 days.

Despite taking precautions, online payday lenders – alongside banks, credit card companies, regular third-tier finance companies and illegal lenders – are in some cases contributing to problem debt.

Pausing for a chat at the end of a busy day, Otahuhu Home Budgeting Service’s Lesley Matia and Karina Mitai say that they probably hear about at least one case of loan shark-type behaviour per week.

“There are the loan sharks that are illegal, operating from houses,” Matia says. “Then there are the loan lenders, like the finance companies.” The worst she’s come across includes illegal lenders who take passports or bank cards as security and those who take out advertisements to name and shame borrowers who don’t pay back loans.

Hutt City Budget and Advocacy Service co-ordinator Peg Upfold says she’s seeing an increasing number of clients with creditors that include online payday lenders.

“We’re not prepared to point our fingers at any of the companies but we are seeing that a lot more clients are going online and getting loans,” she says. “Up until last July, we saw very few of them. Now, I would say three out of 10 of those who come to us for help may have one of these online loans.”

All three advisors said they’d built a positive working relationship with some local finance companies. “If they know that the customer is struggling, they’re in arrears, or they need a top-up loan, if circumstances and income has changed, they refer them to us,” Matia says.

The service’s advisors can then prepare a budget for the client and negotiate to extend repayments or stop interest charges. She suggests setting a budget should be made compulsory before a loan is given out.

“Sometimes you wonder how those companies could give out a loan,” Mitai adds. “Have they done their homework? Just looking at a bank statement shows income, and there’s not much for food already, and they’re giving them a loan?”

"Sometimes you wonder how those companies could give out a loan,” Karina Mitai (third from left)

"Sometimes you wonder how those companies could give out a loan,” Karina Mitai (third from left) Photo: Jordan Dodson

The Credit Contracts and Financial Services Law Reform Bill, which passed the second of the three readings needed to pass it into law this week, will tighten up protection for borrowers.

It would establish a responsible lending code, bring in new disclosure requirements, increase protection against unfair repossession and make the tests for unreasonable credit and default fees more clear. It would also raise the maximum fines for lenders who break the rules to $200,000 for individuals and $600,000 for companies.

“I describe it as a new electric fence around consumer credit with much higher voltage going through it and everyone having certainty about the parameters within which they can operate,” Commerce Minister Craig Foss says. “Things like: nobody can charge interest rates unless they belong to a dispute resolution scheme. So there’s comeback for anyone who feels aggrieved or has some issue with their provider. So that there’s awareness that people can in fact go to dispute resolution schemes and what that means. And of course responsible lending up front. People being fully informed of the obligations that they are undertaking.”

He says the bill is one of his top priorities before this year’s national election.

The concern is – if you were to set a cap, where would you set that, would it be revisited, what circumstance? Is that per annum, is that monthly?

The big thing missing – and the change that Child Poverty Action Group’s Claire Dale most wants to see – is a cap on interest rates. Australia, Canada, Japan and South Africa are among countries to already have a cap in place. In Australia, the cap is currently set at 48 per cent per year. The UK is expected to introduce an interest rate cap from January 2015.

Foss stands by the decision not to introduce a cap. “The concern is – if you were to set a cap, where would you set that, would it be revisited, what circumstance? Is that per annum, is that monthly? All sorts of details would need to be provided.”

Setting a cap, he says, may set an artificial target for lenders to meet. “Remember, they’ve only just recently brought them in, in the UK and Australia,” he adds. “We’ll learn from what they're doing and see how it plays out after a few years.”

Dale isn’t thrilled with this decision. She's also not waiting around for the government to solve the problem. In 2009, with the support of the NZ Federation of Family Budgeting Services, NZ Council of Christian Social Services and Kiwibank, she set up the Nga Tangata Microfinance Trust to provide interest-free loans to individuals and families in need.

Since it started lending in 2010, the award-winning trust and its sister company have together provided 40 interest-free loans of up to $3,000. Some loans make it possible to purchase basic assets such as bedding and car repairs. Others provide relief for problem debt.

Adam – who was referred to the trust by his budget advisor early this year – is one recent recipient. He’s still in financial difficulty but, with a $3,000 no-interest loan replacing his previous loans, his repayments are now down to about $28 per week.

Dale would eventually like to see the trust expand to offer entrepreneurial loans. Right now, though, she’d just be happy to be able to help more families. “We won’t ever be able to help everyone but if we can reach people before they’re in crisis, then we will make much more of a difference to many more families.”

Another possible solution, put forward by FIRST Union’s Edward Miller, is to lobby for the right to a weekly wage.

“For a lot of people, when these kinds of demands for capital come up on a short-term basis, the difference between having to wait ten days to get your pay and having three days could be the difference between going to see a payday lender and face up to exorbitant interest rates,” he says. He’s also aware of some employers that help out by offering wage advances.

“Interestingly enough, that happened with the first loan that we had signed up,” Dale says. “We were still learning and couldn’t act quickly enough.” The trust’s client needed to buy school uniforms for her kids. When she became worried her loan wouldn’t come through in time, she told her boss – who gave her an interest-free loan for the amount required. “It was a glorious, happy story.”

There’s no quick fix to New Zealand’s problem debt. But, with major reforms due to pass and growing public awareness, this year could be the start of the solution.

*Names and identifying details have been changed

Avoid getting into problem debt

  • Are there other options? Can you defer your bills, ask friends or family to help you out or ask your employer to give you a pay advance?
  • Visit a local budget advisor for some free and confidential advice. A good place to find someone is through the NZ Federation of Family Budgeting Services.http://www.familybudgeting.org.nz/get-budgeting-advice
  • If you decide to borrow, shop around for a good deal and check out the Ministry of Consumer Affairs’ 10 Questions To Ask Before You Borrow Money.

Get out of problem debt

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