It's Money Week, let's talk about debt for low-income families
To wrap up Sorted’s Money Week, which had its focus on “What does debt do for you?” CPAG talks to Robert Choy, executive officer at Ngā Tangata Microfinance about high-interest debt and its effects on low-income families.
CPAG: What is the main reason people go into debt, in your experience?
RC: For those on low incomes, the reason for incurring debt is not for unnecessary or luxury items, more often it is for basic household expenses or family necessities. The high cost of housing, health costs and cultural expectations are other common reasons. Also, life events and emergencies inevitably occur; the car breaks down, the fridge stops working, children become ill, or reasonably paid employment ceases. Those on low incomes sometimes make poor financial decisions like everyone else, but their ability to recover from the consequences is far more limited, compared to those on higher incomes.
CPAG: We would consider that people go into debt not because they are wasting their money, but rather due to a lack of it. Would you consider that to be the case?
RC: Similar to our experience in Ngā Tangata, the Auckland City Mission’s Family 100 Report also highlights how despite often knowing how to budget effectively, those who are in situations of poverty have no option but to incur increasing levels of personal debt to cover their day-to-day expenses. All the more when unexpected life events and emergencies occur.
A large number of clients who have presented us their budget worksheets, have high accommodation costs and essential outgoings as well as other high-interest debts incurred, so their budget situation does not provide sufficient to pay for food, clothing and day-to-day household bills.
When your expenditure is greater than your income, there is a constant juggling process, trying to pay off your debts whilst having sufficient for food and other essentials; creating a continuous state of stress and financial hardship.
CPAG: What is the danger for low-income families of borrowing from fringe lenders such as payday loan providers?
RC: A key premise behind the predatory fringe lending sector is that it targets those on low incomes, who are often unable to access sources of mainstream credit. When unexpected costs arise, and reserves are exhausted, people on low incomes are forced to take the only other available option: easy-access, high-cost loan sharks, pay-day lenders or mobile traders.
Pay-day lenders provide only short term lending ideally, but at an outrageous cost, often charging at least 1.2% per day or 438% annually. Third tier finance companies provide loans with interest rates ranging from 20-40%, but the default interest rate can be up to 10% above that, with extra penalty charges. While truck vendors or mobile traders often charge no interest on purchases, their prices are inflated up to three times the norm.
When people borrow from fringe lenders, they often have not envisaged the total amount of money it will cost them in the long term or the punitive costs of defaulting payments. Such high-interest debt compounded by excessive charges rapidly becomes unmanageable, with repayments that are often unsustainable, causing stress amongst family members, usurping funds needed to purchase food and other essentials, and diminishing any remaining assets the family may have.
CPAG: Is debt among low-income families common? Is this a social or an individual problem?
RC: Yes, debt amongst low-income families is common. While it is primarily a societal issue there are individual factors that accentuate the problem, such as high health costs within the family, having limited access to stable well-paid work, cultural expectations, life events/emergencies and low financial literacy.
There are broader societal influences such as insufficient income for those on benefits, low wages, increases in the cost of essential items, high cost of housing and of course the prevalence of fringe lenders and mobile traders.
CPAG: What would be your recommendation to the policy makers be to provide a solution to the burgeoning stress on families?
RC: One of the major factors in child and adult poverty is the high cost of credit inflicted on families who are poor and financially excluded. Unlike many parts of the world, in New Zealand there is no legal limit on interest rates or on the total cost of credit. Without these protections, it’s very easy for families to get into financial trouble, as high-interest debt compounded by excessive charges quickly becomes unmanageable, and enormous stress upon the family results.
Providing increased support for Budgeting Services situated in low-income communities is crucial as they provide a tremendous support to their clients who are under the burden of such debts: providing a budget plan, negotiating with creditors where possible and advising ways that limited income can be stretched.
Supporting the emergence and delivery of safe fair and affordable alternatives in the credit market such as Nga Tangata Microfinance and other ethical lending institutions would ensure that low-income families have options that do not come with the burden of compounded interest and other charges.
CPAG: What sort of positive improvements in the lives of families helped by NTM have you seen?
RC: Ngā Tangata works in partnership with local budgeting services. We regularly see how paying off a high-interest debt and replacing it with a nil interest loan can release $20, $50, $70 or even more back into the family budget each week. This provides much needed money for essential food or necessities that families trapped in a cycle of debt, have previously forsaken. The budgeting service provides critical support to the client in advice and improving their financial literacy.
From our evaluation conducted last year, 77% of clients communicated a ‘huge’ improvement (scoring 5 out of 5) in well-being and peace of mind as a result of the nil interest loan, with a similar high % scoring a “big” improvement in how they have used or handled money (in areas such as food, sense of control, paying bills on time etc.).
CPAG: What would your best advice be to people who cannot see their way clear from financial hardship?
RC: As managing your finances when on a low-income is extremely difficult, acknowledging their diligent efforts and resilience is foremost. Seeking the support of a Budgeting Service can provide a tremendous help to those who are under the burden of debt: providing a budget plan, negotiating with creditors where possible, providing financial capability skills if needed and advising ways that limited income can be stretched. Many such services work in partnership with Ngā Tangata Microfinance to provide no interest loans to low-income families who meet the lending criteria. These loans are safe fair and affordable in stark contrast to those offered by high-interest lenders.
CPAG: How does Nga Tangata aim to improve the outlook for families who come to you?
RC: Ngā Tangata’s loan products are aimed at providing a safe fair and affordable alternative to the high-interest fringe lenders, as well as to help alleviate the burden and cycle of high-interest debt, for clients in hardship. The financial outlook for clients will be improved via the relationship that clients have with a budgeting advisor, their financial advice and support occurring alongside our loans being valuable if needed. A fundamental aspect of our kaupapa is to facilitate clients successfully paying off their loans and being supported in the long-term towards financial independence.