'Ridiculous' interest rates hit desperate families

When 8 per cent is really 416 per cent

Families are borrowing money at interest rates of up to 8 per cent a week to make ends meet between paydays.

Budgeting services have criticised the rates and say greater restrictions need to be placed on the amount of interest lenders are allowed to charge.

But the Government has ruled out capping interest rates, saying overseas experience suggests it will do nothing to protect consumers.

Super Loans, formerly known as XtraCash, is charging interest of 8 per cent a week on money lent from its three Wellington stores.

Law student Andrew Shann took out a $300 loan - signing a 14-week contract and offering up his guitar as security - as part of his research paper on consumer law.

A copy of the contract shows the $300 loan accrued 8 per cent interest every week for the 14 weeks of the loan period - pushing the total amount owed to $636.

The annual interest rate equals 416 per cent. Mr Shann said the interest rate was "outrageous".

Wellington actuary John Melville said it was "absolutely, stupidly ridiculous". Such loans preyed on the "financially illiterate".

Clients told The Dominion Post the company - whose bright advertising can be seen from outside the Work and Income office across the road in Porirua - provided a service mainstream banks could not.

Ani Haenga, of Cannons Creek, has borrowed from Super Loans four times and yesterday borrowed $50 for a three-month term. She had tried borrowing from a bank but her credit rating made it impossible.

"It's easier, quicker. It's cash in hand. It's affordable to pay back. It makes you budget on your next payday."

Another borrower, who had taken $50 over 10 weeks to top up her cellphone, said she was not worried about not being able to pay the $90 debt at the end because "you can renew it if you can't pay it off".

Super Loans would not comment on its interest rates.

Federation of Family Budgeting Services chief executive Raewyn Fox said "payday" loan providers were becoming common in New Zealand.

Though people generally intended to borrow short term, they often got into trouble if the initial payments were not met and the interest began to stack up, she said,

"If you don't have 100 bucks to pay the bills this week, you are not going to have 100 bucks to pay them next week."

Queensland's government introduced legislation in July capping the amount of interest lenders can charge at 48 per cent, something Ms Fox and Mr Shann said New Zealand should adopt.

Newtown budget and advocacy service adviser Jeff Drane said restrictive interest rate caps could drive lenders underground.

Consumer Affairs Minister Judith Tizard said the Government was monitoring the situation - especially in Australia - and planned a discussion paper, but ruled out a cap on interest rates.

"At this stage, overseas experience does not suggest that interest rate caps would offer any advantage to New Zealand consumers."

- © Fairfax NZ News