Interest rate cap a momentous change – timed well with Money Week ahead
Child Poverty Action Group (CPAG) and Ngā Tāngata Microfinance (NTM) jointly welcome the extra consumer protections added to the Credit Contracts and Consumer Finance Act 2003 (CCCFA), announced this week by Kris Faafoi, Minister of Commerce and Consumer Affairs.
“We are so pleased that Minister Faafoi has heard the voices of financial capability services and consumers through the Select Committee process and agreed to an interest rate cap of 0.8% per day, equating to just under 300% per annum,” says Dr Claire Dale, CPAG’s Spokesperson for Finance and Debt.
“While this is still a cruelly high rate, it is still an improvement on 2% daily interest on defaulted payments amounting to 500% to 600% currently legally charged by some pay-day lenders.”
Other measures already included in the proposed legislation such as the total cost of credit cap being limited to 100% of the principal, will complement the interest rate cap.
Even if it is not up to what the wider financial capability sector had hoped, Ngā Tāngata Microfinance and CPAG are relieved that the Government has accepted that high-cost, easy credit leads to worse problems in the long run. This is reflected in these additions to the proposed legislation that will increase protections for borrowers.
Predatory lending is a significant factor in child poverty and strengthening the protections for borrowers is an important move by the Government. FinCap reports that high-cost, short-term lending takes around $120 million a year out of the pockets of low-income New Zealanders. Repayment of that debt keeps healthy food off the table, and keeps houses cold and crowded.
Minister Faafoi has also included changes so that all mobile traders, whether they charge interest or sell goods on credit, will be subject to the same levels of disclosure and responsible lending requirements, including affordability checks, before credit is given.
However, Robert Choy, Executive Officer of NTM says that a major problem remains.
“The broader fringe finance sector, which charges less than 50% interest, are not deemed to be ‘high’ so are not affected by the interest rate cap and cost of credit limits being proposed. NTM’s experience is that the debt spirals and financial hardship caused in this sphere are much larger in impact and longer in duration.
While this huge area ‘below’ the tip of the iceberg regretfully remains unaddressed, the proposed review in three years will evaluate the impact of the interest limit and other changes and see whether they go far enough to provide the necessary protection for borrowers.
CPAG says, the more that can be done to protect families who turn to lenders because their incomes are not sufficient to meet all of their needs, the better. But our Government must now urgently turn attention to addressing income adequacy, and in particular by significantly increasing benefit levels as recommended by the Welfare Expert Advisory Group, which are currently far too low for those who have need of them.
Background information on Ngā Tangata Microfinance
- Established in 2010 with a vision of building a more just and equitable society for people on low incomes.
- Offers two loan products which are offered at no interest or fees. The first, NILS, is to assist with family asset building and well-being or essential items or services. The second loan product, DRLS, is for relief from high interest debt, and debt consolidation.
- Qualifying conditions for all loan applicants include a Community Services card or a low income and the willingness and capacity to repay the loan within 2 years.
- Ngā Tangata values the relationship that clients have with a financial mentor. Financial education occurring alongside our loans is encouraged.
- The three establishing organisations of NTM are Child Poverty Action Group, New Zealand Council of Christian Social Services, and New Zealand Federation of Family Budgeting Services.
- The loan capital is provided by Kiwibank. J R McKenzie Trust provides funding for operational costs. Good Shepherd Microfinance in Australia and Good Shepherd NZ, has provided advice, support and information.
- In 2013, Ngā Tangata Microfinance Trust and Kiwibank were supreme winners of the NZI Sustainable Business Awards.