How to avoid loan sharks
There's a well-known sub clause of Murphy's Law that states your car will break down, laundry flood, and much-loved pet need emergency surgery all in the same week a big power bill is due.
Unexpected costs have a way of hitting home just when you can least afford them - driving tens of thousands of Kiwis into expensive debt.
The third-tier lending industry, as it is known, is quick to point out that not all last-minute lenders are sharp-toothed loan sharks. Many follow the rules, explain their fees, and use proper channels if you fail to pay.
Then there are outfits like eFeMCee Finance and its director, Albert Loots.
Loots and FMC received a $55,000 fine and agreed to repay borrowers $39,000 after adding about 63 per cent on top of loans for 'payment protection plans' (essentially a bond, at Loots' sole discretion to repay) and insurance (no policy was provided and payment was, again, at Loots' discretion).
On signing up, borrowers were promptly charged 29 per cent interest on the whole lot. In one case uncovered by the Commerce Commission, a 'Ms L' borrowed $3,000 and wound up owing $8000 after FMC added $2,265 in fees and interest.
She paid off $6,435 in weekly instalments, but in two and a half years still owed $2,980 - $20 less than what she originally borrowed.
'Mrs T', meanwhile, borrowed $10,500 cash, repaid $16,767 over three years, and still owed $15,600.
The Commerce Commission was appalled; so was the Financial Services Federation, the respectable face of rule-following non-bank lenders.
Yet not only did people agree to these loans, they made valiant attempts to repay them.
Our Retirement Commissioner says people who don't have bad credit are going to loan sharks without even trying to get money from other, less expensive sources, because they find them less intimidating.
So before you borrow money, here are six ways to save yourself from the sharks.
1.Ask if you really need it
There are lots of reasons people genuinely need emergency money, fast. But taking an expensive loan might not be the best way to get it. As a nation we seem to have cottoned onto that - consumer loans from non-banks (finance companies, payday lenders etc) fell to about $4.5bn last year, from $5.8bn in 2005. Meanwhile bank loans, generally a cheaper option, rose to $7.7bn from $5.9bn.
If it's not really an emergency - think holidays, a new telly or upgrading your car - you might not need to borrow money at all. After all, if you earn enough to pay back a loan, you can save to buy the same item upfront and save all those interest costs and fees.
A good way to bring home the true cost of borrowing is to type the amount of the loan and the interest rate into Sorted's debt calculator.
As Retirement Commissioner Diana Crossan says, "you'll be able to see how much interest you're going to pay, and how ludicrous that looks when you lay it all out." in other words, that $3,000 second-hand Toyota might not seem like such a good buy at $5,000.
2. Try your bank or credit union
According to a Colmar Brunton survey at least 130,500 of us, and probably more, borrowed money from third-tier lenders in the past two years. Most borrowed from finance companies, and the most common were GE Money or Instant Finance.
Some went to finance companies because they'd been turned down by their banks. But others said they found banks inflexible and slow - especially compared with the welcoming arms they showed them in the pre-recession days of easy credit. Finance companies, on the other hand, were friendly, fast and easy. Many borrowers didn't even look at the interest rate.
Crossan says people are missing out on cheaper rates because they wrongly think they'll be turned away from their usual banks or credit unions.
"New Zealand's lucky to have a very, very low unbanked population - in other countries even Australia and America - there's a much higher unbanked population. So...New Zealanders have a relationship with the banks but...some of them think that they won't get a loan."
"Banks are large institutions, they're quite scary and finance companies start to look much more attractive."
She advises trying your usual bank first and seeing what interest rate they offer.
If they say no, consider whether you can pay by credit card and work out the interest rate on that.
You can work your way down the list from cheapest to most expensive loans - the website Interest.co.nz lets you compare interest rates from the major banks, credit unions and finance companies. If you end up with a finance company, you'll know you looked for cheaper options first.
3. Consider family and friends
This one isn't for everybody. If you're under financial pressure, feeling stressed as well as obligated to family over money might not be the best scenario. But if a family member or employer has cash to spare and you can work out fair terms, you might get a better deal than you would from a bank or finance company. Consider cleaning rich old Uncle Albert's pool for a summer.
4. Check your credit history
You might be assuming you have "bad payer" written all over you, when in fact there is nothing to worry about. Or you might have poor credit because of an error, which you can apply to correct. Checking your credit history is free through the big credit agencies. Both Veda and Dun and Bradstreet will supply your report free within two weeks, or faster if you are willing to pay. At the very least you will know what lenders are seeing when they check your credit history. It might not be as bad as you think.
5. Know your rights
When you borrow money, the lender must give you accurate information about what the loan will cost you. Consumer NZ has a good summary of your rights under the Credit Contracts and Consumer Finance Act 2003 on its website. In a nutshell, you must be told exactly how much your repayments will be; how much interest you'll be charged, any other fees (such as loan establishment fees, insurance charges and the cost of credit checks) and what will happen if you can't make your payments. Once you've seen this information you have a three day "cooling off" period when you can still get out of the contract.
Be aware that some less scrupulous lenders might not tell you everything you need to know upfront. When Consumer NZ "mystery shopped" four fringe-lenders and a credit union in Porirua this year it found two lenders would not provide any written figures to take home. There were big differences in interest and fees charged: for a year's $2,000 loan, three finance companies would have charged around $800 while the Aotearoa credit union charged just half of that. So it pays to shop around.
6. Know what you're getting into
Some people just won't have the credit rating, the time or the resources to seek out the best deal. The story of one woman surveyed by Colmar Brunton perhaps sums up why some people choose finance companies, and think bugger the interest.
She rang her bank, where she had her accounts and a mortgage, and asked for an overdraft at short notice because her partner had to fly overseas for his mother's funeral.
The bank said she would have to go to a branch and fill out papers for a credit check - not an option with two small babies at home and a partner away overseas - and refused to email them to her. A finance company offered to email her the papers and turned the loan around in 20 minutes.
If you choose a lower-tier lender, be aware that there's probably a price to be paid for all that speed and friendliness. The Colmar Brunton survey found the majority of finance companies charged between 19 and 39.5 per cent per annum for personal and car loans. Payday loans were even more costly - the interest rates worked out at 498 per cent per annum or higher, making them very pricey if they last longer than a week or two.
Crossan says there will be times when people who don't have a good credit rating need money urgently - and that's when finance companies are needed. But she says you should still make sure you know exactly how much you're paying and when.
Often company reps will explain your repayments in less scary-sounding weekly amounts - but make sure you know the full amount. FMC's Mrs L probably thought $55 a week sounded OK , but she was agreeing to pay back more than twice what she was borrowing.
And not all finance companies are created equal. A good first check is the Companies Office register of financial service providers.
All finance companies are supposed to be registered but many are not, meaning they don't have a registered dispute resolution process if things go pear-shaped. If the company offers money door-to-door and doesn't have a physical storefront, it is probably not a good sign.
"It doesn't matter if it's from a reputable finance company, or even buying on credit card, understanding how much you will pay for the time (you borrow) is in the end what we want," says Crossan. If everyone knew that, there's a chance FMC would be out of business.