KEY POINTS:
Cash-strapped Kiwis considering a loan to get themselves out of a financial hole could end up paying almost twice as much as they borrowed to clear the debt.
The Herald on Sunday obtained one quote which would require more than $25,000 to repay a $15,000 loan over four years.
Our investigation also revealed borrowers were likely to pay hundreds of dollars in administration fees - and could be locked into repayment terms of up to five years.
The figures have shocked budget advisers and Consumer New Zealand, which warned people to shop around for the best deals and to calculate the true cost of any loan, especially in today's high-interest market.
Our investigation involved comparing the interest rates and terms offered by four finance companies, a broker and a high-street bank.
We asked how much we could borrow for a new car, using the same set of circumstances - a single woman with no dependants in her mid-20s with a monthly income of about $2600 after tax. With no hire purchases, a good credit history and one credit card, our application also included a $4000 deposit towards the vehicle.
All loan offers were based on initial phone quotes and lenders stressed they could change further down the process. But the amount companies thought we could pay back comfortably varied widely, from $9500 over 39 months, to a whopping $26,000 over 48.
It paid to shop around to find the best interest rates, but even using the joint lowest rate quoted - 14.95 per cent from broker Active Finance - a $15,000 car could still end up costing more than $25,000 over five years, with loan protection insurance included.
ASB Bank's $25,000 would see us repay almost $36,000 at the same rate over the same period, but that was without income protection insurance.
The highest interest rate quoted was Future Finance's 23.95 per cent, although the cautious staff member pointed out that she was basing this on a "worst-possible case" scenario, pending further financial security details.
At Kiwi Loans, the staff member we spoke to was far more generous, telling us we could easily afford a $20,000 car, and even stretch to a $30,000 model if we wanted. He encouraged us to sign up on the spot, citing pre-approval of a loan within a couple of hours.
Most companies said they would not service an unsecured loan of any kind, although most suggested finding a guarantor. The exception was Active Finance, which said the maximum car loan it could arrange was $15,000, using the new car as security.
But it also said it might be possible to arrange a $5000 unsecured cash loan, which came with an interest rate of 22.95 per cent, including more than $700 in fees. Paid back over four years, the combined loan could reach about $33,000.
Consumer New Zealand testing manager Hamish Wilson said many people didn't realise the true cost of a loan. "Too many people see the $100-a-week repayment figure and think they can afford that, without realising that even on a low rate, the interest can be enormous."
Mangere Budgeting and Family Support Services' chief executive, Darryl Evans, said many companies offering longer repayment periods were "manipulating" figures to make monthly repayments lower.
Avanti Finance lending manager Stephen Massey said a full quote was provided once customers wanted to take their application further.
ASB Bank's Glen Martin said most loans around the amount we asked for were paid over five years. The bank encouraged customers to go for longer terms because they could pay off the loan earlier without incurring an early repayment penalty.
He said customers were reminded they had five days to change their mind after the document was signed.
General manager of loan broker Active Finance, Rachael Bergquist, claimed the total cost we calculated for a $15,000 loan could be up to $6000 cheaper. She said applying through a broker was "completely different" from signing up with a finance company.
She said the repayment figure listed included optional loan protection, and the total cost was not quoted to customers until after approval was sought.
Legally, a lender must provide a disclosure statement, setting out key information, within five days of a customer signing a credit agreement.
It should include the amount borrowed, the annual interest rate and how interest will be calculated, the payments, fees and charges, and the cost of paying off the loan early. alice.hudson@heraldonsunday.co.nz
SECURITY IS 'TONGAN STUFF'
Financial security isn't the only thing needed to have a loan approved by some companies.
The Herald on Sunday visited two money lenders in South Auckland's Otahuhu to ask for a loan, only to be turned away based on ethnicity.
At Lelei Finance a woman at the front desk pointed to a room full of rolled-up floormats and tapa cloths and told us only "Tongan stuff" was used as security for personal loans "at the moment".
She confirmed the room was full of items collected for non-payment on existing loans and said the business was expanding. We were told to try again for a loan "in December".
It was a similar story at Funaki Enterprises, run from an old superette in Otahuhu Town Centre. The manager said he was "definitely not racist" but would only accept freehold property in Tonga as security, not property or vehicles in New Zealand. Both companies have been in trouble with the Commerce Commission.
Leilei Finance was this year fined $37,480 for 18 breaches of the Credit Contracts and Consumer Finance Act and two breaches of the Fair Trading Act after it was found it had failed to disclose interest rates, how interest was calculated, a debtor's right to repay early and the right to cancel the contract within three days.
The company also published photos and personal details of at least four debtors in a local Tongan newspaper to shame them, claiming they had defaulted on loans that were, in fact, unenforceable.
Funaki Enterprises was among six South Auckland lending companies warned by the commission last August. TVNZ's Fair Go spoke to clients who said they were made to hand over bankcards as collateral and divulge pin numbers. Photos were published in the Tongan Times if clients had trouble paying loans and it was alleged some weren't given a copy of their contract and didn't understand the service charges.
