Month: February 2018

Toward removing predatory lending from our futures

debt

As the cost of living increases across the country, many working whānau struggle to make ends meet. Many whānau turn to predatory lenders with obscene interest rates just to meet their basic needs. In an age of policymaking geared toward wellbeing, there is an opportunity to explore new ways to address the financial stress experienced by many whānau who fear not knowing how they will be able to put food on the table or pay the rent or bills, without entering into a vicious cycle of debt.

Microfinancing has come up over the past few years as one policy route to support low-income whānau to escape the debt trap. In short, microfinancing is about offering small (usually under $5000) no interest or low interest loan solutions to people in need. These loans are usually offered as a means of improving wellbeing. We’ve seen success in initiatives such as Ngā Tangata Microfinance Trust (NTMT), a pan-charity trust that provides small, zero interest, no fee loans for asset purchases and debt relief for qualifying low-income applicants. Kiwibank provides the capital for these small loans and helped set up NTMT’s microfinance services. While public-private partnerships are one way of providing microfinance to whānau, I am interested in how a state owned microfinance service might work. However, before I delve deeper, I’ll provide a little context about what got me thinking about this kaupapa.

This morning, I was looking for vacuum cleaner parts. I was searching one retailer’s website and came across OxipayTM, a payment plan that allows you to make four fortnightly instalments but you get your product upfront. This wasn’t the first time I’d come across one of these payment plans. The other week, I was looking for work clothes and the retailer had a similar plan with AfterpayTM.

I briefly looked into these products to see if there were any hidden snags. They were relatively straightforward, but it would pay to look into them before you choose to use them. The products operate as follows:

  1. You select the option at checkout and sign up
  2. The finance company pays the retailer on your behalf (if the value is $1500 or less)
  3. You make repayments to the finance company
  4. You make the first repayment upfront at the time of your purchase
  5. You pay the next three next instalments fortnightly thereafter
  6. You can pay before the due date. If you don’t pay before, then the company will direct debit from your account on the due date

There is no interest but you need to pay on or before payment is due or have the money in your account on the due date otherwise you might be penalised with late fees. These weren’t too onerous, a $10 late fee and further fees if it remained unpaid for more than 7 days. However, there is always the risk that if you remain in arrears your account may be passed on to collections where you will likely attract additional penalties and fees. You will likely also harm your credit rating, making it difficult for you to access these (and other) services in future.

For me, these kinds of plans seem ideal as I could get the item/s immediately while servicing the payments in line with my pay cycle. But regardless of my purchasing behaviour (boring!), I found the model useful for thinking about how microfinancing could work to support all New Zealanders who find themselves in challenging financial circumstances, to sidestep the high interest quick cash short term schemes that can spiral out of control and exacerbate an already stressful situation.

Many whānau – from a range of backgrounds, are currently seeking out predatory lenders to help them with basics like rent, groceries, vehicle maintenance and school uniforms. Not because they can’t manage their money, but because they simply do not have the money to cover those costs upfront i.e. necessary expenditure exceeds income. Like many people, I want to live in a society where people can continue to meet their needs in tough times (and yes, in an ideal society, no one would experience tough times, but that is not the reality of now) which is why I consider that state owned microfinancing services might make sense.

The idea of state owned financing will cause a visceral reaction in some quarters and targeting toward low-income groups (the group microfinance is typically intended to support) will make the hairs on the necks of some stand on edge. But for reasons other than just making it more palatable, I’m in favour of expanding microfinancing by universalising it in recognition that we all need a little bit of help sometimes, and that we all need access to services that help us get through those difficult periods without the traps and snags of private (particularly predatory) lending companies. These are our economic realities, and failing a total economic revolution, this isn’t going to change anytime soon so we will need sticky plasters while we work on structural and systemic change.

What should be included in the design of such a service?

Empathy, needs to be at the heart of any microfinance service to acknowledge we all need a bit of help every now and then and in my view instalment repayment plans work in this sense by making borrowing and paying back less stressful for people fearful of how they will meet the needs of their whānau – whether as a persistent issue, or as a one-off.

We would need a user-friendly model that makes access to finance a simple and non-bureaucratic process. The technology for that already exists as companies like Oxipay and AfterPay have shown. We also have a ready-made account system through RealMe and we know that financing through a state owned institution is possible. Studylink is a clear example, as is the partnership between NTMT and Kiwibank.

There will always be risks around rorting the system, and these are clearly the kinds of hooks that would need to be worked through. But note, deductions on incomes and bank accounts already take place when dealing with fines or reparations, and tax codes could be another way of repaying loans as is done with student loans. Surely it couldn’t be that difficult to ring fence tax collected for microfinancing repayments.

I should note, while I support universalising availability, I remain of the view that repayments must cater to the needs of the borrower. Service design would need to be careful not to penalise our most vulnerable whānau by making provision for extended instalment plans and fee waivers, so that those at the lower income end can repay at a rate that does not trap them in a borrow-repay cycle.

I suppose my thinking is that task just does not seem that impossible or unpalatable when we are talking about small loans, repaid regularly, to improve the wellbeing of whānau and the overall hauora of our society. If we want to eradicate predatory lending, then we need alternatives that make their core business obsolete and this is one possible route.

 

 

Endnote: 

If you or someone you know is in need of microfinance, contact the entities listed below to see if you are eligible for assistance. 

From Sorted:

Microfinance providers in New Zealand

 

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