$40,000 spent trying to get away from $900 loan

Thursday, 11 October 2018

Blair estimates he has spent up to $40,000 trying to get rid of an initial $900 loan. FILE PHOTO

Auckland man Blair* is stuck in a payday lending cycle.

It started when he needed money to move to Auckland for work about three-and-a-half years ago. Because he had bad credit history, his only option was to turn to payday lender Seed Cash for the $900 he needed.

Working as an IT engineer and earning $65,000, he did not expect to have trouble paying it back - but it has got out of control.

The loan grew over time to $1300. Now, each month the cost of paying that amount back wipes his available income – and he ends up borrowing it again to get through the next month.

* 'Prosecute the hell' out of dodgy lenders

* Lender allowed borrower to take more loans to repay debt**

On top of $1300 to repay, there's $583.49 in interest charged. The statements do not make it clear what interest rate is being applied, although the Seed Cash website says it charges between 167.9 per cent and 438 per cent a year.

He now pays about $2000 in repayments every 58 days but still cannot get out of debt. 'I just haven't managed to clear it. Even time I get close to doing it I get to the point where I'm spending more money paying it and I need to take out another one once it's paid off to afford my daily living expenses.'

Every time, he is also required to pay a new establishment fee of $46 and a direct debit fee of $10.

He says banks will not give him a credit card or personal loan to transfer the debt to because he still has an unpaid utilities bill of $250. 'The default is less than the interest I'm paying on my loan. All I would need is the bank to give me something in order to get out of the loan shark cycle then I can start progressing.'

Payday lenders do not do positive credit reporting, as some lenders do, which would enable him to prove that he is meeting his repayments.

Over four years, he estimates he has paid about $30,000 to $40,000 in repayments.

Have you been in this situation? Email susan.edmunds@stuff.co.nz

Seed Cash said it had a hardship policy through which customers could apply to have their payments rearranged for a time.

That would mean interest was frozen and penalty fees were waived.

It's this sort of lending that the government revealed this week it wants to crack down on.

Commerce Minister Kris Faafoi and Prime Minister Jacinda Ardern said on Wednesday that lenders who did not adhere to responsible lending principles – including not lending more than borrowers can be expected to manage - will face new penalties up to $600,000.

There will also be an interest and fee cap that means people can never be required to pay back more than twice what they initially borrowed.

Financial coach Shula Newland said it was clear the lending had not been responsible if a person had to keep going back, simply to survive once it had been repaid.

'[Blair] could raise a complaint to the Commerce Commission or take up an official dispute to the lender's dispute organisation.

'We see clients that get stuck in this payday loan cycle, and the only way to stop it is to stop borrowing from payday lenders. This may mean negotiating the current payday lender loans to drip feed them off at affordable levels, or a consolidation loan. Either way the person needs to realise that they need to change their habits, and stop relying on debt.

'This means creating a balancing budget and setting up savings to fall back on. Getting professional help with this will streamline the process with free advice via EAP or a free budget adviser.'

A spokeswoman for the National Building Financial Capability Trust said another option could be a microfinance lender such as Nga Tangata Microfinance or Newtown Ethical Lending. 'To work with these lenders you will need to go through a financial capability or budgeting service. You will need to check if these lenders are available in the area that you work in. Microfinance lenders often have limits to what they can lend and criteria on the type of debt relief they will do but it is worth investigating whether you are eligible.'

A Commerce Commission spokesman said responsible lending was an area of focus. 'We are not a dispute resolution scheme so are unable to resolve specific individual situations. We get thousands of complaints every year and are not able to investigate all of them.'

* Blair does not want his real name used, to protect his identity.

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