Catriona MacLennan: Pulling the teeth from loan sharks

Photo / The Aucklander

The global credit crisis has tightened access to money and made low-income people even more vulnerable to loan sharks.

It is heart-breaking, week after week, in my work in South Auckland to deal with people who owe large sums of money because they have been ripped off, both in the goods they buy and by their loan contracts. My clients have always had great difficulty in obtaining loans from banks because of their low incomes, lack of jobs or job security, poor credit histories and lack of securities and guarantors.

As a result, the lowest-income people in our communities are pushed into the arms of loan sharks and other unscrupulous lenders. Those least able to afford high interest rates and excessive loan fees accordingly end up paying the largest sums for both.

However, it does not have to be like this. The Government could wipe out loan sharks overnight by taking the following 10 steps:

1. Cap interest rates - the interest rates lenders can charge should be specified by law and it should be an offence to charge more than that rate. Maximum interest rates could be pegged to the official cash rate, inflation rate or bank interest rates and periodically reviewed. This single step would end most of the rip-offs immediately because it is the huge - and compounding - interest rates which low-income borrowers pay that cost them the most.

2. Cap loan fees - consumer law requires loan fees to be reasonable and related to the costs incurred in preparing loan documents. However, loan contracts nowadays are speedily prepared using precedents and with a few strokes on a keyboard. There is no reason why uniform fee rates cannot be set to prevent unscrupulous lenders from claiming inflated costs.

3. Make low-interest loans available through KiwiBank - borrowers could still pay interest and the lender could still earn a profit, but the interest rate would not be excessive.

4. Further simplify loan documents - credit law changes in 2005 were supposed to make contracts easier to understand, but they are still complex and contain many pages of small print. Many borrowers have no idea of how much they will pay over the life of the loan - they only understand their weekly repayment amounts. The front page of the loan document should contain nothing other than the following statement in large, bold type: "YOU WILL PAY A TOTAL OF $X IF YOU TAKE OUT THIS LOAN."

5. Introduce strict controls on insurance relating to loans - people are commonly talked into taking out loan repayment insurance covering risks which do not apply to them. An example of this is beneficiaries being signed up to insurance contracts covering them for loss of a job.

6. Make it mandatory for borrowers to receive legal advice before signing loan contracts.

7. Change the law relating to cooling-off periods - borrowers can cancel loan contracts within three working days of borrowing money. However, if debtors have taken possession of goods - such as cars - they cannot cancel the car purchase contract. This means that, even if borrowers belatedly understand that they have been ripped off in their loan contracts, they cannot cancel them because they still have to pay for the vehicle or other goods and cannot get money elsewhere.

8. The Ministry of Consumer Affairs should be charged with taking cases on behalf of individual consumers to enforce credit laws. The Commerce Commission has responsibility for monitoring and enforcing the legislation, but does not act for individuals. The ministry could do that.

9. Change the law to plug the gap which has emerged in relation to early repayment fees. The 2005 act was supposed to prevent lenders from charging excessive loan repayment fees, but the first test case produced a disappointing outcome.

10. Establish government-run car yards which sell reliable secondhand cars at reasonable prices. After more than a decade of dealing with desperately poor people who buy faulty cars at greatly inflated prices and are then further ripped off by being charged huge interest and loan fees, I see no other way of preventing this. Cars are an essential for people with families, especially those with sick children who require frequent trips to doctors, hospitals and chemists.

I bought my car for $3900 at a car fair, with the help of someone who could check it over to see that it was not faulty. As I paid cash, I had no interest or loan fees.

I mentally contrast my situation every week with the position of my clients, who may end up paying up to $30,000 for their second-hand vehicles, which may break down within days of being purchased.

The Government could prevent all of these rip-offs by taking these steps on behalf of the most vulnerable members of our community.

* Catriona MacLennan is a South Auckland barrister and author.