Catriona MacLennan: Ten ways to stamp out loan sharks

There is no such thing as easy money, and there are plenty of loan sharks looking to take advantage of people in financial difficulties. File photo / NZ Herald

New Consumer Affairs Minister Simon Power is promising speedy action against loan sharks.

This is extremely welcome news.

Successive governments have sat on their hands and utterly failed to take comprehensive and effective steps to prevent the most vulnerable in our communities from being ripped off at the hands of predatory lenders.

Over the past 14 years of my work in South Auckland I have seen the heartbreaking toll exacted by such lenders on poor families in dire financial straits.

Beneficiaries and workers on very low incomes, with poor credit histories and lacking assets such as homes and late model cars, are unattractive customers for banks.

This means that when emergencies occur - as they often do when one is poor - people rapidly find themselves dealing with loan sharks because they are turned away by first and second-tier lenders.

There is ample evidence of this in the 2007 report Pacific Consumers' Behaviour and Experience in Credit Markets with Particular Reference to the "Fringe Lender" Market.

The paper recounts exactly the same types of examples as I have seen over and over. These include a man who borrowed $9000 to buy a car and ended up with a $21,000 bill, and someone else who paid $10,000 for a car but faced total repayments of $25,000.

One woman found that a car worth only $5000 was to cost her $29,000.

However, this does not need to continue: the Government has the power to stamp out loan sharks overnight.

All that is required is the will to take action.

Here is my ten-point plan -

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. The Government and local councils should also take steps to facilitate microfinance schemes in New Zealand.

"Instant" loans provided by text or by vans cruising streets in disadvantaged areas should be banned.

4. Further simplify loan documents

Credit law changes in 2005 were supposed to make contracts easier for borrowers 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. Mandatory legal advice

Make it mandatory for borrowers to receive legal advice before signing loan contracts and teach financial literacy in schools.

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. More help from the Ministry

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. Fix early repayment fees gap

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 in the District Court.

10. Involve the Government in the car market

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 positions of my clients, who may pay up to $30,000 for their secondhand vehicles, which may break down within days of being purchased.

*Catriona MacLennan is a South Auckland barrister.