KEY POINTS:
You can hard, you're a two-income household, why shouldn't you have what all your friends have? A newer car, a flat-screen TV, brand-name trainers for the kids. No cash? Easy - whack it on the store card or credit card, or get a loan.
For many New Zealanders, debt has become a fact of life, having credit is as normal as having a bank account.
A new global survey suggests two- in-five (43 per cent) of us use spare cash after spending on essentials to pay off debt, a greater proportion than any other Asia Pacific country.
The Nielsen Global Online Consumer Survey also reveals debt is a major concern for 28 per cent of people, second only to the economy, which troubles 37 per cent.
We are worried, but we keep borrowing. Budget advisers, who deal with the fall-out from the culture of debt, are alarmed by our rising tolerance, especially of lifestyle debt.
Sue Deason, of North Shore Budget Service, estimates the level of debt people will stomach has at least doubled in the past two years. "That's the big change."
It's not just a low-income trend. "We have clients who earn more than my husband [a minister] and I do. There's a lot of sad situations where people have some debt but they're managing fine because they have a good job, but then something happens - their husband or wife leaves them, they lose their job, they get sick."
Even without crises, debt can spiral. Deason cites one woman on a "decent income" who had racked up $42,000 on lifestyle expenses. "That's increasingly common, having this much debt and having nothing to show for it."
Raewyn Fox, of the Federation of Family Budgeting Services, says: "We're seeing increasing numbers of middle income, two-income households. Often the presenting issue is 'we are a bit worried about our mortgage', but behind that are other debts. People are putting everyday items like food and petrol on their credit facility and not being able to pay it off at the end of the month."
Debt brought North Shore couple Sally, 45, and Les, 44, to the brink of bankruptcy before despair drove them to seek help (real names withheld on request). Sally worked in the food industry and Les was a truck driver.
But with two teenagers and a buy-now-pay-later mindset, their total debt crept above $30,000.
"If we saw something, we just bought it, whether it was on hire purchase or a credit card."
Before approaching a budget service, they consolidated their debts, only to find extra fees and interest pushed the balance to about $54,000.
"We thought we were doing the right thing. It was explained to us in a manner that if you do this it's going to be a lot easier for you, but it's not until you start paying that you realise it's not a lot easier," says Sally. "With all the adverts 'come and consolidate your debts', a lot of people are falling into that trap."
The service took over managing the family finances, the family promised to eschew further credit and to live on a strict allowance.
Sally: "It was a big shock to the system. We went from having two incomes to not quite having one. The kids were used to being able to have what they wanted, and suddenly it changed and they were like, 'oh my God'. Once they realised what was happening, they were okay with it."
The adviser gave them five years to become debt-free; they made it within three-and-a-half, and have recently bought a rental property in the central North Island.
They've learned to respect money. "We realise if we see something we want we have to save for it."
PART OF the problem is self-delusion about what we can afford. Observes Deason: "People always budget for a fine day, but they should be budgeting for a rainy day. We're all blaming finance companies but we've got to realise they didn't force you to borrow money."
But there's also a strong argument that our deepening debt culture is being fuelled by lenders' aggressive marketing, inadequate checking of borrowers' capacity to meet repayments, and, in some cases, excessive fees and interest rates.
And some of these complaints have been levelled at mainstream loan companies and store cards attached to major chain stores.
Intensive marketing by chain stores of buy-now-pay-later deals, sometimes honeyed by interest-free periods, has driven a shift in the way we pay for big-ticket purchases from traditional hire-purchase to store card-based revolving credit, which allows for further purchases to be put on the card. Major store cards include the Farmers Card, Q card, Warehouse Red Card and GE CreditLine. All except the Red card can be used at a wide network of retailers.
Graham Gill, of the Commerce Commission, says complaints to the competition watchdog reveal confusion between "no interest' and "deferred payment" promotions, which are sometimes combined.
Some borrowers assume there will be no payments within the interest-free period, and are thrown by the minimum repayments often required with cards even under no- interest offers. "That's a fish-hook people have got to be aware of."
A survey published last month by online market researcher Buzz Channel suggests 27 per cent us have hire purchases or deferred payments, making this the second most popular credit type after credit cards (69 per cent).
Results also indicate one-in-five of us have personal loans. Little wonder, perhaps, when more than half of all respondents (55 per cent) had received unsolicited offers of credit extension in the past year, including 44 per cent of unemployed respondents.
The survey highlights how difficult "easy" credit can be to get out of, even when you have the money. A third of respondents who had tried to cancel their credit had encountered significant difficulties.
Most credit companies, including banks, were mentioned, but the three that kept coming up were GE Finance, American Express and Farmers' cards.
In some cases, borrowers had to justify their decision to one or more people, or complete long-winded paperwork (when all it took to establish the loan was a phone call), and some were charged fees for paying off their debt before the loan's full term was up.
A survey of several major lenders by the Herald on Sunday last week found the AA charges $45 for early repayment of car loans, and GE Money charges $40 for early repayment of personal loans.
The law says a creditor can only charge administration costs and a "reasonable" fee for its losses if a loan is repaid early. What counts as reasonable is before the courts.
In an important test case, the Commerce Commission is prosecuting Avanti Finance for allegedly charging excessive fees to borrowers who repaid their loans early.
Avanti is one of New Zealand's largest lenders to low-income borrowers, offering car and personal loans, debt consolidation and mortgages.
An Avanti Finance customer service representative told the Herald on Sunday last week that early repayment on a personal loan attracts a fee equal to 90 days' interest on the closing balance, generally at a lower interest rate than the agreed rate.
As well as charges relating to the early repayment fees, Avanti is facing 50 charges under the Fair Trading Act of misrepresenting the interest rates, fees and conditions of the loan.
Its website promises financial products that are "affordable and realistic. Our aim is to provide financial solutions for customers that are within their means and in terms that are easy to comprehend".
Auckland District Court judge Anne Kiernan has reserved her decision until June 23. If she finds against Avanti, the company it could be forced to compensate borrowers, sending waves through the industry.
Reasonable fees and accommoation of people's changing circumstances is Darryl Evans' plea to lenders. The chief executive of Mangere Budgeting and Family Support Services gets particularly worked up about early repayment fees. "You should be commended not penalised, not charged another fee, another kick in the guts for doing what everybody's telling you to do."
Steep establishment and missed payment fees are other bugbears.
In the Herald on Sunday sample, charges to set up credit ranged from nothing for a Red or Farmers Card to $475 for a personal loan from Avanti.
Evans says, for the most part, the companies he deals with are more reasonable than they were two years ago.
By law, borrowers are entitled to request changes to terms of their loans if they strike unforseen hardship, such as illness, redundancy or the end of a relationship. The catch is borrowers have to renegotiate with the creditor before they get behind in payments.
Evans says while major companies such as GE Money have good hardship procedures, he's struck an "astounding" number of service representatives who don't seem to be aware of them.
Budget advisers say credit unions are often an overlooked but a good option. Credit Union Auckland general manager Rob Cox says they differ from other lenders in that they look at the whole picture, assisting clients to strike a good deal on cars, for example. He's shocked at some of the loan contracts clients have with organisations, citing a recent case where a man paid $29,599 for a three- and-a-half year loan for a $15,790 car.
The underlying problem, says Fox, is credit companies' readiness to lend to borrowers who can't afford repayments. "We can see [many companies] make their money out of punitive charges because such a high percentage of these loans go wrong.
"You can advertise a low interest rate but it's by these other charges that these companies make their money."
HOW TO BORROW SMARTER
1.Work out how much you can afford before you borrow.
2.Before you sign on the dotted line, be clear about:
* How long it will take to pay off the loan.
* Interest rates and how interest is calculated.
* How much the loan will end up costing, including interest and fees.
* How much it costs to set up.
* If it will cost anything to pay it off early.
* Fees for late or missed payments.
3.If you don't understand the loan contract, take it to someone who will. Credit Union Auckland and budget services will look over it for free.
4.Shop around, as with any product there is huge variation in the price of money.
5.Avoid brokerage fees for third parties, where one company arranges the credit via another company.
6.Take your time. Resist pressure to sign immediately - often a sign of a pricey deal.
7.Know your rights under the law:
* Lenders must provide written information about what the loan will cost you
* You have a cooling-off period of three working days after you have received the written disclosure. statement, during which time you can cancel the statement. But if it's a hire purchase deal and you've already taken possession of any goods, you must still buy them with finance from elsewhere.
* Establishment fees must directly reflect set-up costs.
* Early repayment fees must reasonably reflect the lender's loss, for example from interest rates having fallen.
* If you have signed an oppressive contract - one with harsh or unreasonable terms - you can take your case to the Disputes Tribunal, which may order a change to the terms.
* If you strike "unforseen hardship" and are not behind in your payments you can ask the lender to extend the term or postpone payments.
Sources: Raewyn Fox, Darryl Evans, Consumer.org.nz
HOW $5,000 CAN COST $8680
Kim Hartley knows how easily debt can balloon if you don't pay attention to the fine print.
The former Auckland IT specialist, who is now based in Queensland, borrowed $5000 from Gold Band Finance in June 2005 to tide her over until the first pay from a new job.
By last week, she had paid back $7553, with $1128 outstanding, including a settlement fee. Of the amount repaid, 22 per cent ($1638) was on interest and 27 per cent ($2043) was on fees.
Drawing the loan cost $1339 in fees on day one. The interest of 14.95 per cent is charged monthly, with an extra 5 per cent default interest charged if a payment was missed. Missed payments also incur a $25 fee.
Hartley admits she didn't ask how much the loan would cost her at the outset. "I had just started a new job after returning from travel, and had found out I was going to have a six- week wait until I got my first pay.
"I desperately needed the $5000 to cover my living costs until then. I didn't stop to think about the opening fees - I certainly didn't realise they were that high."
She'd been burnt before by a car loan with a different company that's now in receivership.
"When I left New Zealand they sold the car on my behalf, for about $5000 less than the loan amount, leaving me out of pocket several grand even though I had made all payments on the loan on time for about 18 months."
Hartley says she's learned the hard way to establish the true cost of a loan before she signs on the dotted line.
For now, her contracting work is saving her from herself: "I can't get a loan/credit in Australia anyway - no one will give contractors a loan."
