The government has just released a draft legislation to protect people from unscrupulous and irresponsible lenders.
Thousands of people are caught in debt traps under the perennial grip of such lenders who have no sympathy for their plight and the prevailing economic conditions.
Consumer Affairs Minister Chris Tremain (who has since been appointed Internal Affairs Minister) said that he would be visiting community and industry groups around the country to discuss the draft ‘Credit Contracts and Consumer Finance Amendment Bill.’
“The Government is getting tough on loan sharks and lenders who do not play fair. Money lenders should not be able to prey on desperate people, leaving them and their families trapped in a spiral of debt,” he said.
We understand that the new legislation will effect substantial changes to the Consumer Credit Law in a decade.
It is time for a significant shift in lending laws to increase protection for borrowers and target irresponsible lenders.
It is also time to consider expanding the concept of ‘micro-finance.’ Thousands of people even in advanced countries remain ‘under-banked,’ meaning that they are excluded from mainstream bank lending and credit cards, both of which are increasingly stingy, because of bad credit scores or irregular incomes.
The under-banked still have options. They can go to pawnshops, which might charge 100% annual interest on loans backed by assets. They can take out unsecured loans from doorstep-lending outfits, with rates of up to 500% per year. There is also payday lending, where the borrower gives the creditor permission to take money straight from his next pay cheque.
Some experts argue that such exorbitant lending will continue as online lending booms and the economy stutters. Payday loans often carry punitively high interest charges.
Many of these are illegal loan sharks.
With such high rates, it is not surprising that debts often spiral out of control.
Lenders say their prices reflect the risks: with unsecured loans to dodgy clients, the only way to stay afloat is to charge high rates. According to them, since loan periods are often short (as in payday lending), clients do not actually pay all that much. This is a circular argument: high rates mean more defaults.
Like most people in the know, we do not believe in the arguments of loan sharks that they are simply catering to the demand at a price.
Education on debt management is imperative.
An increasing number of lawmakers and common New Zealanders are joining the chorus to control loan sharks. They rightly believe that the situation has worsened over the past few years.
During the recession, many Kiwis have fallen on hard times and borrowed money as a last resort. But high-interest loans often trap people in an increasing spiral of debt, they said.
We are aware that some loan sharks charge a weekly interest of 8%, adding up to more than 400% per annum. The new legislation calls for better consideration of loan security and interest rates that are more transparent. People should know exactly how much a loan would cost them.