Payday loans

frank (1)Central government is currently reviewing consumer credit law.

That has awakened media interest in the scandalous Payday Loan industry, which has grown exponentially in recent years with the arrival of overseas companies setting up shop (quite possibly because of the light handed regulatory environment of the non-bank lending sector and the low level of financial literacy in New Zealand).

Payday loans are short-term unsecured loans of small amounts intended to get the borrower though to the next payday, but generally they have a maximum term of a month or two. According to the website of the lenders, typical examples are paying for groceries, power bills, vehicle breakdowns, and the like. The reality is there are probably a host of other reasons why desperate people end up at the doorstep of these usurious lenders. They usually start out of small amounts – just a few hundred dollars, and every lender has different terms, but they do have one thing in common – outrageously high interest rates: 500% per annum is not unusual.

That means for every $1,000 these Payday lenders have out, they will receive $6,000 back by the end of the first year. If they invest that $6,000 at the start of year 2 they will end the year with $36,000 by the end of year 2, and $216,000 by the end of year 3, and just under $1.3m by the end of year 4, and that’s from an investment of just $1,000.

From what I have seen there’s nothing illegal about what these lenders do. They don’t even lurk in the shadows as one imagines. They are quite upfront and open about the terms. For example, Payday Advance have this statement of their website:

“Annual Interest Rate (AIR). Our AIRs range from 520% to 624% p.a. or approx. 1.42% to 1.70% per day. Implications of Non-payment. We encourage loans to be repaid in accordance with agreed dates, however in the event of a non-payment (or other default) the following applies: Fees – A fee of $50 applies to each missed or failed payment, a fee of $10 for each reminder letter & a fee of $10 for each week you remain in default. Default Interest – applies to any overdue amount at 104% per annum. Collection practices – We will promptly contact you regarding any missed payments and we undertake to manage collection of our loans in accordance with legal requirements and industry standards. Credit Score implications – When/where credit scoring is used in NZ a repaid loan will most often positively influence your credit score. However when a missed payment, failed payment or unpaid loan occurs this is likely to negatively impact on your credit score. Renewal policy – Renewals are not automatic and are available on loans (other than your first loan) where your past payment history is satisfactory to us and are subject to our discretion. A fee of $20 applies.”

Handy Cash publish this financial health warning: This website only offers short term loans. Short term loans can be expensive and may not solve your money problems. There may be cheaper borrowing options and/or other assistance available to you. For example, if you are on Government benefits, ask if you can receive an advance from WINZ. To decide if this product is right for you, please review our website carefully.”

Cash Converters advised they have a daily rate of 1.315% (480% a year).

Many of the lenders say their loans are a way for borrowers to “take control of their finances”. Borrowing money at 500% interest rate is NOT taking control of your finances! It’s actually digging a bigger hole and creating financial poverty.

According to the introduction to the Bill being introduced by central government, “The Bill provides that the primary purpose…is to protect the interests of consumers in connection with credit contracts, consumer leases, and buy-back transactions of land. The [Bill] also aims to promote confident and informed consumer participation in markets for credit, and fair, efficient, and transparent credit markets.”

In fact, the proposed changes will do nothing to alter the fact that Payday lenders are charging 500% interest rates to desperate individuals. A quick review shows that these lenders are already disclosing, at least on their websites, the absurdly high costs of their lending. In its current form, the new legislation will change nothing.

Surely there is nothing acceptable about a 500% lending rate and it’s a disgrace that central government would turn a blind eye to it. Some may say let the free market work and if people want to pay 500% interest then so be it. The free market principles are based on people acting rationally and of their own free will. There is nothing rational about desperate people paying 500% on a loan to buy for groceries, or to satisfy an addiction.

Public submissions to the proposed changes close on 1st of November.

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