A quick google search of “pay day loan” will result in numerous advertisements for various local businesses offering short-term loans. These loans are advertised as quick and easy with a simple online application. These loans guarantee “same-day” money with “No Hassle, No Fuss”.
However, under the glowing headlines and flashy marketing campaign New Zealand does not cap the interest rate that these high interest short-term pay day loans can charge. Instead, pay day loans use a per day rate rather than an annualised interest rate. Typically, those per day rates can be around 1.5% per day. This highly misleading rate is only made apparent when you get the calculator out and work out that this is an annual interest rate of over 540%. Together with those crippling and deceptive interest rates there are further high standard establishment, monthly and transactional fees charged on top.
These loans are targeted at lower income families struggling to meet the cost of living from week to week. Reports from budgetary services operated in lower socio-economic areas report that lenders are not adhering to any responsible lending code and allow borrowers to place themselves in increasingly precarious financial positions. Once under the crippling effect of a high interest rate loan, financial advisers find the families become stuck in an endless cycle of more and more consumer debt.
The new labour minister, Kris Faafoi, has indicated that they are looking into capping interest rates and improving disclosure requirements for this type of lenders. However, the current law allows these highly profitable companies ( the company Moola.co.nz placed 2nd in the Deloitte Fast 50 with growth of 1013%) to market directly to people in desperate financial positions with low levels of financial literacy.
One of the more cynical elements of this industry is that pay day loans are set up in a way where the lender forces the defaulting borrowers to refinance or capitalise the unpaid portion of their loan. In simple terms the defaulting borrower is then required to pay back the unpaid interest that they earned at 540% at that same crippling 540% interest rate. Therefore, there may be circumstances where a defaulting borrower is required to pay back their initial loan multiple times over. A further startling fact is that it appears that, in an effort to alleviate enforcement costs, these companies insist on a proforma wage deduction form to ensure that wages are paid directly to the Lender and thus saving the costs of enforcement.
Pay day loans are not a new issue and have been present in the UK and Australia over the last decade. However, the rapid growth of these local companies has coincided with rapidly rising living costs. Increasingly people are being forced into utilising pay day loans to meet the bare necessities, unforeseen emergency costs and/or simple things like back to school costs.
What we have here is a business model built on the fact that people will not understand the terms and therefore setting them up to fail. This creates an endless cycle of debt. The government have indicated they are looking into this issue, however the fact that the rates of interest charged is currently unregulated is deeply concerning.