Irresponsible lenders on borrowed time
While borrowing money at an annualised interest rate of up to 693% wouldn’t appear at the top of anyone’s wish list, many New Zealanders find themselves in desperate situations and end up looking for the kind of immediate answer pay day loan lenders provide. I can imagine the panic when the mechanic bills go way over what you expect, or your children need emergency dental care, and your ability to get credit from a bank is tapped out. These kinds of life shocks are expensive, usually unexpected, and leave people vulnerable to the ease of consumer finance available at interest rates that seem reasonable when just paid back over a week or two.
I can imagine the panic when the mechanic bills go way over what you expect
In reality the fine print details annualised interest rates of between 456-693% for planned repayments, and a variety of immediate and severe sanctions for those who fail to pay the loan back in time. Unfortunately, the kind of financial hardship that makes people likely to seek out pay day loans in the first place, means they’re more likely to fail to meet the repayment timelines.
By law, lenders have a responsibility to ensure that customers are able to repay the loan before lending out money, but like many good regulations it appears the devil is in how they are enforced. The Minister of Commerce and Consumer Affairs points out that even with “the 2015 amendments to the Credit Contracts and Consumer Finance Act 2003 that were intended to prevent harm to consumers by requiring responsible lending … irresponsible lending – and consequent harm – has continued to be a serious problem.”
Like many good regulations it appears the devil is in how they are enforced
A recent review of consumer credit regulation offers a lot of good ideas out for improving the situation, but it is disappointing that in the same review we see a major theme of feedback from both industry and consumer stakeholders is the insufficient enforcement of lender responsibilities. It outlines that between June 2015 and February 2018 the Commerce Commission issued no warnings, settlements or prosecutions for breaches of the lender responsibilities. This suggests that either there hasn’t been a single breach of lender responsibilities in almost three years, or that our methods for detecting improper or predatory lending are woefully inadequate.
To be clear, individuals have responsibility for the choices they make and the contracts they sign. And pay day lenders are sometimes the only place that will offer assistance to people who can’t get finance elsewhere. This is a part of the credit market that is rife with vulnerable people facing difficult life choices, and as always there is a side of the market that acts responsibly, and there is the real risk with over-regulating that we simply force these type of lending arrangements underground. Having said this, there is no point making things better on paper if we don’t take enforcement seriously. The regulation of these arrangements should have the teeth required to protect vulnerable New Zealanders. Submissions on this review are open now, so you too can have your say.