Payday loans, toxic credit and lenders of last resort


Payday lenders have such a bad reputation that finance companies take cover and people refuse to finance as soon as they see one on a bank statement.

That’s the message from an Auckland-based financial broker who specializes in debt consolidation.

Payday loans generally charge higher interest rates for immediate short-term credit depending on the income and credit profile of the borrower. These loans are also called cash advance loans.

The broker, whom has agreed not to name, says it deals with non-preferred lenders like Avanti Finance, Budget loans and Genève Finance. But he says those companies are now increasingly reluctant to deal with clients who have used payday lenders.

“If there is a payday lender like Moola on the bank statements, he immediately refused. “

He says they’re required to get 90 days of bank statements from a potential client before they can approve their funding. But he says payday lenders have such high default rates that if someone uses one, they just need to be blacklisted.

“It’s more negative than their current credit rating. “

But he says his concern is that if non-preferred lenders refuse to offer financing to these people, their only option will be lenders of last resort.

Its reflections are supported by the Managing Director of Instant Finance, Richard de Lautour.

“There are some common things that we look at that indicate someone is having difficulty,” he says.

And de Lautour says payday loans are often a sign that someone is in financial trouble.

“It’s good if you borrow $ 250 and pay it off the next payday, that’s all good. But that’s not what we’re seeing. If we find that a client has a habit of going back and forth with payday lenders, that’s a big concern for us.

De Lautour says that in such cases Instant Finance would prefer to deny the request and refer the person to a budget advisory service.

“There has certainly been a growth in payday loans and this is a concern for all responsible lenders. “

Keith McLaughlin is the Managing Director of the Centrix consumer credit bureau. He says he doesn’t know if people are having their loan applications rejected because of payday lenders.

“Our experience with payday lenders is that they act responsibly and have credit reports drawn up where appropriate. But we don’t get involved in whether a lender will give someone credit. We just provide the information and from there they make their own decisions based on their risk appetite and their lending policy. “

Online credit companies

One of the major players in the online payday loans market is Moola. The company was launched in 2013 and its website states he specializes in “granting quick small loans online”.

“You can borrow $ 100 to $ 5,000 for 2 to 368 days. When you get a loan with Moola you know exactly what you are getting, we promise that there are no hidden fees, no fine print and no nasty surprises. What you see is what you get. Our loans have been designed to provide quick, clear and fair financing to Kiwis who need help making ends meet.

For short term loans of 2 to 44 days for amounts ranging from $ 100 to 1,000, it has an annualized interest rate of 620.5%. While loans of $ 1,025 to $ 3,000 for between 63 and 185 days have an interest rate of 328.50% per annum and loans of $ 3,050 to $ 5,000 over 240 to 368 days have an interest rate of 149.65%.

Then in the fees section, it gives you a breakdown of the fees it has for everything from canceled direct debits ($ 20) and payroll deductions ($ 29.78) to defaults ($ 20.08) and at extensions ($ 11.12). Although interest rates are high, it is only after a borrower takes these charges into account that they can get a clear idea of ​​the true costs. And if you miss a payment, those penalty fees will start to weigh in.

Awaiting regulatory change

In October last year, the government announced a series of planned changes to the bill amending the Credit Agreements and Consumer Finance Bill, which it said were intended to crack down on abusive lending practices. It follows a review of consumer credit laws by the Ministry of Enterprise, Innovation and Employment (MBIE). The proposed changes include the introduction of limits on the amount of interest and fees which can be charged on high cost loans to prevent people from accumulating large debts, as well as stiffer penalties for those who break the law, including irresponsible lending.

According to the government’s proposals, there would be a limit of 100% on the total interest and charges on the amount borrowed. This would mean that if someone borrows $ 500, they will not have to repay more than $ 1,000 over the life of the loan.

“If our default rates were really high, we wouldn’t be in business”

Moola manager Edward Recordon is somewhat surprised when asked about the financial broker’s comments.

“If our default rates were really high, we wouldn’t be in business,” Recordon says.

He says the company works with a bad debt ratio of 7-8%.

“So for every 100 loans we approve, 7-8% go bad and if we make a bad decision it will cost us dearly,” Recordon says.

He says the company deals with unsecured loans and cannot afford to make mistakes.

“Our average loan amount right now is $ 475 and over six weeks we would earn $ 250 in interest and fees,” says Recordon. “But after paying our fees and taxes, we would only earn $ 10. Our margins are very low.

“The only reason we’re targeted in the media is because we get so much media coverage. They see the high interest rates and think we are making a lot of money and that is not true.

But despite Moola’s supposedly tight margins, in 2017 he was announced as the winner of the Deloitte Fast50 Index rewards. The awards are designed to recognize high growth companies in New Zealand and Moola has not disappointed with 1013% revenue growth over the previous three years.

Recordon admits some payday lenders have a bad reputation, but the Christchurch-based manager says he thinks they are more likely to be those based in South Auckland.

“There are two types of payday lenders. Those like us who try to be responsible and others who lend to customers refuse us all the time. These are the people we will not lend to. We refuse 75% of our loan requests.

It’s time to act

The Commerce Commission is well aware of the problem with online payday loans and announced in November that it had launched an investigation into Moola regarding its fees and lending practices.

But Recordon says regulating the industry isn’t very straightforward.

“The problem with the law right now is that it’s not black and white and it’s a principled system. It tells you that you need to look at a client’s income and expenses, but it doesn’t tell you exactly how to go about it, ”says Recordon.

“From a compliance perspective, it’s hard to know if you’re compliant. The Trade Commission may not agree with your approach, but they also don’t know what the right approach is and they have to go to the courts to find out.

Action by the Trade Commission

In June of last year, the Trade Commission started High Court proceedings against online payday lender Ferratum New Zealand for alleged breaches of its responsibilities as a lender.

The case is still before the courts, but it illustrates many of the same problems. The Commission alleges that the company failed to conduct reasonable inquiries into borrowers’ requirements and goals, failed to exercise due diligence in advertising loans, and failed to assist borrowers in make informed decisions about whether or not to take out loans. She also alleges that this behavior, along with interest rates above 183%, was oppressive.

A spokesperson for the Trade Commission says it continues to see too many lenders failing to adhere to responsible lending practices, putting many borrowers in difficulty.

“The Commission is concerned about all irresponsible lending behavior, including on the part of payday lenders. We currently have other significant investigations underway involving expensive short-term lenders (which include “payday lenders”), including violations of lender liability principles. The Commission is also currently heavily engaged in reforms to the Government’s Credit Contracts and Consumer Credit Law, as many of these reforms aim to curb unscrupulous lending behavior. “

He says it is important that all consumers know what to look for when getting a loan. The Commission says people need to know what it is going to cost them, if they can afford it, what repayments they will have to make and what interest rates or fees they will have to pay. They will also need to know what will happen if they miss a repayment or if they cannot repay the loan and how long it will take them to repay the loan.

Payday lenders Ferratum, Payday Advance and Save My Bacon were not available to comment on this story. While Genève Finance refused our interview request.

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