Identifying & Avoiding Predatory Lenders in New Zealand

Understanding the Red Flags of Predatory Lending

Predatory lenders often target vulnerable individuals, those in immediate need of funds, or those with poor credit histories. Their tactics are designed to ensnare borrowers in a cycle of debt. Recognising these tactics is the first step in avoiding them.

Common Indicators of Predatory Lending:

• Aggressive Sales Tactics: Unsolicited calls, emails, or high-pressure tactics to make you sign immediately.
• Lack of Transparency: Unwillingness to provide clear terms, interest rates, and all associated fees in writing.
• Too Good to Be True Offers: Loans guaranteed regardless of credit history, extremely fast approval without proper checks, or promises of solutions that seem overly easy.
• High Upfront Fees: Demanding significant fees before the loan is even disbursed, often non-refundable.
• Rolling Over Loans: Encouraging you to refinance or take out new loans to cover existing ones, increasing your debt each time.
• Unusual Payment Methods: Demanding payment in cash, gift cards, or methods that are difficult to trace.

“A legitimate lender will always be transparent about their terms and give you time to consider the offer. If you feel rushed or confused, it’s a major warning sign.”

The Trap of High-Cost Loans and Hidden Fees

While not all high-interest loans are predatory, a significant characteristic of predatory lenders in NZ is their reliance on exorbitant costs that make repayment nearly impossible. These costs can appear in various forms, making it difficult for borrowers to understand the true price of the loan.

Understanding the Cost Structure:

• Exorbitant Interest Rates: Often far exceeding market rates, sometimes disguised as daily or weekly rates that compound quickly.
• Excessive Establishment Fees: High one-off fees charged at the start of the loan.
• Penalty Fees: Steep charges for missed payments, late payments, or early repayment, designed to generate more revenue.
• Account Keeping Fees: Regular charges for simply having the loan account open.

These fees and rates often combine to create an unmanageable debt burden, where borrowers end up paying back many times the original loan amount, struggling to keep up with repayments, and often needing further loans just to service the existing ones.

Illegal Loan Practices in New Zealand

New Zealand has robust legislation designed to protect consumers from unfair lending practices. The Credit Contracts and Consumer Finance Act 2003 (CCCFA) and its associated Responsible Lending Code are the cornerstones of this protection. Any lender operating in NZ, whether online or brick-and-mortar, must comply with these laws.

What’s Illegal Under NZ Law for Lenders?

• Failure to Lend Responsibly: Lenders must make reasonable inquiries to ensure the loan is affordable and suitable for you, and that you can make repayments without suffering substantial hardship. They cannot offer a loan if they know you cannot afford it.
• Charging Unreasonable Credit Fees: While fees are allowed, they must be reasonable in relation to the lender’s costs. Excessive or disguised fees are illegal.
• Misleading or Deceptive Conduct: Making false or misleading statements about a loan’s terms, interest rates, or fees.
• Harassment or Coercion: Using intimidation, threats, or undue harassment to recover debt.
• Unfair Contract Terms: Including terms in a loan agreement that are significantly unbalanced or detrimental to the consumer.
• Not Providing Key Information: Failing to disclose all key information about the loan, including interest rates, fees, repayment schedules, and default charges, in a clear and understandable way.

If a lender engages in any of these practices, they are breaking the law, and you have rights and avenues for recourse. Don’t let fear or confusion prevent you from seeking help.

Protecting Yourself from Loan Sharks: A Step-by-Step Guide

Empowering yourself with knowledge and taking proactive steps is the best defense against predatory lenders in NZ. Here’s a practical guide to safeguard your financial well-being:

1. Research and Verify Lenders

• Check if the lender is registered on the New Zealand Companies Register and the Financial Service Providers Register (FSPR). Legitimate lenders must be registered.
• Read reviews and seek feedback from others. Be wary of lenders with numerous negative reviews or no online presence.

2. Understand the Full Cost of the Loan

• Always ask for a written quote detailing the total amount repayable, including all interest and fees.
• Use online calculators to compare interest rates and fees from different lenders.
• Ensure you understand the Annual Percentage Rate (APR), which reflects the true cost of borrowing over a year.

3. Read the Contract Carefully

• Never sign a contract you don’t fully understand.
• Look for hidden clauses, early repayment penalties, or terms that seem unfair.
• Take your time. A reputable lender will allow you to take the contract away to read it thoroughly.

4. Seek Independent Financial Advice

• Before committing to a loan, especially a significant one, consider consulting a financial advisor or a free budgeting service like Sorted.org.nz or a local Budgeting Service.
• They can help you assess your affordability and explore alternatives.

5. Know Your Rights and Report Concerns

• Familiarise yourself with your rights under the CCCFA.
• If you suspect a lender is predatory or engaging in illegal practices, report them to the Financial Markets Authority (FMA) or the Commerce Commission.
• You can also contact the Financial Dispute Resolution Scheme (FDRS) if you have a complaint about a financial service provider.