Dr Deborah Russell
Most of the time, Consumer Credit Contracts work well in New Zealand.
For example, a person who wants to buy a new TV for a big sporting event like the Cricket or the Netball World Cup might go into a retailer and ask to buy a TV on credit.
After asking a few questions and checking the person can actually afford the loan, the retailer makes a sale, the customer gets the goods and all going well, the loan gets paid back on time and everyone is happy.
However sometimes these contracts go wrong, especially when borrowers are in a tight position and turn to lenders of last resort, such as ‘Payday Lenders.’
For someone who just needs some short term credit, these facilities can work well.
Multiplicity of problems
However, if the lender provides finance to a person who is already in financial difficulty, the costs of the loan can skyrocket, and the borrower can end up in a debt trap, paying interest rates of several hundred percent and often penalty fees as well.
Behind these harmful loans are heart-rending stories of hardship and despair.
Some irresponsible lenders target our poorest and most marginalised citizens, with some families borrowing to pay for the essentials. While this type of credit can be a quick fix to financial problems, we know that many consumers are trapped in a cycle of debt, causing extreme hardship – and often, intergenerational poverty – for them and their families.
It can also create ongoing mental health problems for people as they try to deal with the stress of repaying huge interest and penalties on loans.
Limiting interest accruals
The Credit Contracts Legislation Bill strengthens the requirements to lend responsibly, especially in relation to assessing a borrower’s capacity to repay a loan.
It will limit the accumulation of interest and fees on high-cost loans by restricting the amount that can be paid in interest and fees to no more than 100% of the amount that was borrowed in the first place.
Additional measures announced on September 3, 2019, cap the maximum interest rate that can be charged is 0.8% per day.
Mobile traders such as ‘truck shops’ who often sell goods on credit at inflated prices (especially in low-income areas) will be required to check that borrowers can afford repayments and are making an informed decision when they enter into a credit contract.
This means they will be required to operate under the same conditions as other lenders.
While most lenders are responsible, some are predatory.
During the Select Committee hearings, one person told a story about how she had unwisely taken out a short term loan. She managed the first two repayments, but was a few dollars short for the third payment. She immediately incurred penalties, which made her situation worse. She tried to negotiate with the company, but failed, and even begged them to give the loan to a debt collection agency because at least then she would stop incurring penalties.
The company refused. After working with a budget advisor she was able to get the loan repaid.
Just a few weeks later, on her birthday, the company contacted her by text.
“Happy Birthday. Why not treat yourself to a loan?”
Striking a balance
As always, the government needs to strike a balance between enabling businesses to operate successfully, and protecting consumers.
The Credit Contracts Legislation aims to set this balance a little more in favour of consumers, while still allowing responsible lenders to operate.
In order to ensure that the balance is right, there is a requirement to review how they are operating three years after they come into effect.
Dr Deborah Russell is elected member of Parliament representing the Labour Party from New Lynn in West Auckland. The Credit Contracts Legislation Amendment Bill was introduced to Parliament by Commerce and Consumer Affairs Minister Kris Faafoi on April 9, 2019 and passed its First Reading on April 30, 2019. It is currently being scrutinised by the Parliamentary Select Committee on Finance and Expenditure of which Dr Russell is the Chairman.