Debt crisis grows

DROWNING IN DEBT: Interest free loans pose a risk for some buyers.
DROWNING IN DEBT: Interest free loans pose a risk for some buyers.

Timaru's budget advice service has been swamped with 692 clients over the past 15 months - with an average debt of $14,900.

Timaru Budget Advisory Trust's Don Macfarlane said in the past financial year 492 new clients brought with them $8.5 million of debt.

For the first quarter of the current year, to the end of September, 200 new clients had brought in $1.8m of debt.

"The biggest amount of debt comes in February and March, when the post-Christmas depression hits and school costs come in. Of the $1.8 million of debt that has come in in the last quarter, 22 per cent of that is finance company loans and 18 per cent from mortgages."

Mr Macfarlane has concerns around "interest-free" loans offered by finance companies, some up to five years interest-free. He had encountered companies charging 49 per cent interest.

"People don't do what they should do and save money for when they have to pay, and at the end of the period it is turned into a hire purchase and some are even charged interest back to the start.

"I had one client come in and she had bought a fridge for $1000, interest-free. Then at the end of the year she couldn't pay so she was charged 30 per cent interest for the previous year and 30 per cent for the coming year, and the $1000 fridge became a $1600 fridge.

"Often the loans are for goods which are continually coming down in price as well."

Of those who take loans, 80 per cent will pay on time and 20 per cent will default.

"That is 20 per cent of people that these companies are taking all of the gouges out of and laughing all the way to the bank."

Clients were across the board he said, and 80 per cent were beneficiaries and low wage earners.

"Employment laws are stacked against low wage earners or part-time workers. The only good thing that has happened for the low paid is Helen Clark's working for families. At least there was a financial benefit for parents going back to work.

"We do deal with moderate to high earners who have over-committed, with credit being scattered around like confetti by banks at the moment."

The service is only funded for 191 clients.

"Basically I need to fundraise up to $85,000 a year."

Is he able to raise that amount?

"We have two years full funding in the bank - we are a budget service after all."

The Timaru Herald