The cost of credit matters
New Zealand could be separated into two distinct debt environments. For the financially included, banks offer mortgage rates ranging from 4.39% to 6.40%, and overdraft rates ranging from 12.9% to 16.9%. For those who are financially excluded, unable to borrow from mainstream banks for whatever reason, their debt environment starts at interest rates above 30% – and over 500% per year is not unusual, nor is it illegal.
Most other countries cap interest rates on consumer credit: South Africa at 24%, Japan at 20%, United Kingdom at 42.6%, Canada at 60%, Australia at 48%, and Thailand at 15%. In New Zealand, there is no total cost of credit cap, nor an interest rate cap.
The cost of credit matters. To a great extent, when incomes are low and limited, the cost of credit determines whether or not the debt can actually be repaid. When incomes are low, crises happen more frequently. Having no buffer of accumulated savings – no ‘emergency fund’ – should the car break down or your shoes finally fall apart, is a crisis. You need the car to get to your job. You need to wear shoes at work. And there is no money for car repairs, or shoes. The crisis means there is no money for food for the children. When there are no safe, fair choices, people in crisis will go to third-tier lenders, to loan sharks. Their shop fronts line the streets of our poorest suburbs.
For many families, the high cost of credit is keeping them poor, and it is keeping their children hungry. The high cost of credit is one of the causes of poverty, and poverty is one of the leading factors contributing to childhood illness, disease, disability and deaths in New Zealand.
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