Money week: Stop the stress of high-interest debt

Ngā Tangata Microfinance supports this year's Money Week focus, which asks the question of a cross section of New Zealanders "what does debt do for you?"

One of the responses was "It stresses me out". Unfortunately, this is the norm for those on low incomes unable to escape the burden of high interest debt. The reason for incurring debt is seldom for unnecessary or luxury items. In fact, most often such borrowing is for household expenses and children's necessities. The less income you have, the more often emergencies occur: the car breaks down, the fridge stops working, children become ill, or paid employment may cease. Once reserves and the generosity of family or friends is exhausted, and without access to mainstream credit (perhaps late payment of bills has resulted in a bad credit rating), those on low incomes are forced to take the only other available option: easy-access, high cost loan sharks, pay day lenders or mobile traders.

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 also added. Payday lenders provide short term lending at an outrageous cost, charging 1.2% per day or 438% or more annually. Truck vendors or mobile traders often charge no interest on purchases, but their prices are inflated twice to three times the normal price, and then add extra costs and fees.

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 such consumer protection, it's very easy for families to get into financial trouble. High interest debt compounded by excessive charges quickly becomes unmanageable, and enormous stress upon the family results.

Budgeting Services offer tremendous support to their clients who are under the burden of such debts: providing a budget plan, explaining the fine print (and real cost) of the finance contract, negotiating with creditors where possible, as well as advising ways that a limited income can be stretched.

"Financial Mentors from many services have at their disposal an effective tool to assist clients entrapped in high interest debt" says Robert Choy, Executive Officer of Ngā Tangata Microfinance Trust. The Trust provides no interest, fee-free loans to low income families who meet the lending criteria. In stark contrast to those offered by high interest lenders, these loans are safe fair and affordable. With capital provided by Kiwibank, Ngā Tangata is expanding throughout Aotearoa.

The debilitating stress of high interest debt need not be permanent. Budgeting services and ethical lenders like Ngā Tangata Microfinance are available to support clients alleviate their debt and bring their finances under control. While it may take time and determination to stick with a budget plan, making a start on this course during Money Week, with the peace of mind that results, is undoubtedly worth it.

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, operating in Australia since 1982, has provided advice, support and information.

  • In 2013, Ngā Tangata Microfinance Trust and Kiwibank were supreme winners of the NZI Sustainable Business Awards.