With $16.7 billion worth of personal consumer debt in New Zealand, there’s no doubt that Kiwis have a normalised view of borrowing money. The market itself permeates every corner of society, with the ability to buy a t-shirt on a buy now pay later scheme, upgrade your television with 60 months interest free finance or buy a new car with no deposit down.
However it’s the predatory end of the consumer finance sector that’s caught the eye of the Government as they look to crack down on high cost loans, generally targeting society’s most vulnerable.
The original legislation from the Credit Contracts and Consumer Finance Act introduced back in 2003 was designed to protect borrowers with a range of new requirements imposed on lenders across the board.
The mandatory disclosure requirements, reasonable fee test, introduction of hardship applications and tightening of the repossession laws were positive steps taken to protect consumers. However as with all things, the market quickly evolved.
Since 2003 New Zealand has seen the introduction and rapid growth of high cost payday lenders.
These companies offer short term finance with annual interest rates in excess of 500%. The largest payday lender to date, Moola, currently charges 620.5% annual interest for loans under $1,000, which equates to an eye watering 1.7% per day. Fees are then added on top of this, further extending the total cost of the loan.
Following years of concern and a wide range of submissions the Government has decided to put their foot down.
With new legislation currently before Parliament, the Credit Contracts Legislation Amendment Bill is introducing a cap on fees and interest, in an aim to protect the nation’s most vulnerable borrowers. Driven by Consumer Affairs Minister Kris Faafoi, the changes take aim at high cost loans, which are those with an annual interest rate in excess of 50%.
The major changes include a proposed capping of all interest and fees at 100% of the principal. This means that despite the annual interest rate on the contract, no borrower will ever be faced with a debt on a high cost loan that exceeds their original advance.
Combined with a restriction on the charges levied by the lender, the Amendment Bill is set to limit all daily charges including fees to 0.8%. Essentially eradicating payday lending in its current format.
The Bill goes further and adds consumer protections in the areas of affordability, advertising and the requirement for companies to be run by fit and proper persons, which surprisingly has been overlooked in the past.
As these changes come into play, many are left asking just what will happen to those borrowers who truly need payday loans.
One argument is that the stricter legislation will drive borrowers toward black market lenders, unregulated and offering much more oppressive products. However if we look at the current competition in the market, it’s unlikely that those currently using payday loans will be unable to access finance from lower cost lenders.
In 2018 the Commerce Commission suggested that there were approximately 190 finance companies, 12 banks and 12 credit unions or building societies. All of these 214 plus lenders are competing in the personal lending space, with a range of products to suit a variety of consumers throughout New Zealand.
The banks have a commanding presence with over $11 billion worth of consumer lending in New Zealand and second tier finance companies make up the remaining $5.7 billion. With such scale and scope it’s fair to assume that borrowers will simply replace their high cost loans for much more reasonable financial products.
The nation’s largest bank ANZ currently advertises personal loans with an annual interest rate of 13.90% and even second tier lenders such as Pronto Finance have personal loans from 11.97%.
Whilst banks have been slow to adopt convenient technologies which paved the way for easy payday loans, second tier lenders are quickly evolving.
The majority of finance companies now offer an online service similar to payday lenders, without the burden of high cost loan terms. These technology driven products will surely take the gloss off of payday lenders, who are quick to tout convenience as their major appeal.
Combining technology, falling interest rates and proactive legislation taking effect on March 1st 2020, we look set to bid farewell to the exorbitantly high costing payday loans.
