How new laws are pushing predatory loan sharks closer to extinction
Amid fears of growing financial hardship across New Zealand, a global campaign against high-interest lenders appears to be gaining traction.
Payday lenders, truck shops, loan sharks: the names alone are enough to conjure grim images of shady operators and con artists hiding in dark spaces to prey on the financially vulnerable. While reality isn’t always so cinematic, their business models don’t do much to improve common perception.
High cost lenders are known for their opportunistic advertising and for offering quick and easy loans to people, often without ensuring that they are able to repay the money. With interest on loans sometimes reaching 600% per year, debt can easily spiral out of control and destroy lives, pushing people into a deep hole from which it may be impossible to get out.
As New Zealand enters an economic recession and unemployment is expected to peak at 10% next year, there are fears that vast waves of financially struggling households will be seduced by the quick and convenient money from payday lenders. , resulting in crippling debt and widespread poverty.
This is why, a few months ago, the government accelerated a bill to hamper high interest rate loans. The An Act to amend the legislation on credit contracts – which was passed in 2019 but came into effect in May this year – has a number of new restrictions, the most important of which is the interest and fee cap which prevents someone from being charged more than 100% the value of any amount borrowed. This means that if a person borrows $ 500, they will never have to repay the lender more than $ 1,000, including fees and interest.
Payday lenders and trucking shops are also now required to make reasonable inquiries into the financial condition of the borrower to ensure that he is able to repay the loan without significant hardship and that the loan is likely to fall. meet their needs. Truck stores, in particular, must also assess the affordability of customers before selling merchandise on credit.
With violators facing a $ 600,000 fine, the new rules are apparently too onerous for some high-cost lenders, forcing them out of the market since the legislation came into effect. Checkers Finance says on its website that it is no longer issuing loans due to government crackdown, while the pawnshop and payday lender Cash Converters announced in June that it was closing four stores and laying off 80 employees because of the new laws.
As for other payday lenders operating in New Zealand, some have since expanded their models so that they now charge just below the 50% interest that is a high cost loan. Moola, one of the largest in the country, now describes itself as a responsible lender on its website and has applied the interest cap in its loan calculator. Meanwhile, Christchurch-based Save My Bacon argued it was already moving away from payday lending long before the new rules came into effect.
“The company – even before the legislative changes – transformed the business from high cost loans and more to longer term flexible loans with low interest rates,” said Tracey Gillman, CEO of Save My Bacon.
With such changes in the market, the pressure certainly seems to be paying off. However, Tim Barnett, CEO of the financial capability body Fincap, said it is not only the interest cap, but also the power and awareness of borrowers that is influencing the landscape.
“[Payday lenders] relied on people who were wrong and complained and they relied on poor supervision to make their models work, ”he said.
Under the Law Amending the Law on Credit Agreements, borrowers who have obtained unaffordable or unsuitable loans will now be able to claim legal damages under dispute resolution programs, which could include repayment of all debts. interest and costs and compensation for any damage. Lenders are also required to pass a “fit and suitable person” test and submit statistical information about their business to the Trade Commission on an annual basis.
Barnett said these demands along with the government’s serious efforts to raise awareness “are setting a new standard.” The legislation is now very similar to that of the United Kingdom which has been very successful in forcing payday lenders to adapt or exit the market altogether.
There are fears, of course, that by ensuring that loan sharks lend responsibly and by examining the financial situation of borrowers, desperate borrowers will be pushed back and forced to seek loans from even more nefarious sources like gangs.
To deal with such a risk, the government was invest significant resources in financial capacity services to form a kind of safety net – a place where people can always go to find a solution to their money problems. This includes financial mentoring services like Money talks – a free helpline where people can discuss their finances and make a plan to get out of debt or access responsible loans. There are also nonprofits funded by banks that offer responsible loans without interest or at low interest rates to those in financial difficulty, such as Kiwibank-championed. Ngā Tāngata and supported by BNZ Good shepherd.
Good Shepherd CEO Fleur Howard said she fully supports the move against loan sharks, who often lead people to find a quick fix in the world of long-term money problems.
“We strongly believe that the disadvantages of these high cost loans far outweigh the advantages,” she said.
“With these choices, people looking for these loans are now more likely to access a service like ours that has positive results in terms of a fair and short-term financial solution, while contributing to longer financial capacity. term and well-being, or decide to access a much longer-term solution such as financial mentoring.
While many lenders have obeyed the new laws, it remains to be seen whether or not there will be a lot of enforcement from operators who choose to flout them. The Trade Commission confirmed that it is still assessing lenders’ compliance with the legislation, but has not opened any investigation into alleged violations of the new rules on high-cost loans.
In the meantime, he has called for some scalps in recent successful court cases against payday lenders for breaking the old law on credit agreements in recent years.
In separate cases, lenders Ferratum and Pretty Penny were convicted of violating responsible lending requirements and failed to ensure their loan agreements were not oppressive. The two were ordered to repay the borrowers and Pretty Penny has said she will be pulling out of New Zealand in her settlement agreement.
High cost lenders have a habit of reincarnating like other businesses, and Pretty Penny could very well reappear in another form. Either way, a few valuable payday loan skins nailed to the wall send a very strong message to those looking to issue a 600% interest loan.
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