Beware high-interest Christmas loans: Fears families will face festive 'debt spiral'

Thursday, 9 December 2021

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For Tanya*, a high-interest loan was the only way she could afford her children’s birthday presents.

For Josephine, it was the only option to buy the car she needed for work.

Both were quickly sent into spirals of debt. The repayments sucked up the bulk of their weekly outgoings, leaving scraps to cover food and bills. The inevitable missed payments led to more fees, more interest, more debt.

Natalie Vincent is worried struggling families are going to end up in similar situations this festive season as they look for ways to afford Christmas after a financially tough year.

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Vincent is the chief executive of Ngā Tāngata Microfinance, which provides interest-free loans to help low-income New Zealanders out of tight financial situations.

A lot of people are already struggling after losing jobs or hours due to Covid, she said. Then Christmas rolls around; people have had a hard few months of lockdown, they feel due a reward, and they want to celebrate with friends and family.

High-interest loans and buy now, pay later schemes put an indulgent Christmas seemingly within reach, with adverts boasting piles of new presents and promises to “take the stress out of Christmas”.

Levin woman Josephine, who asked for her last name to be withheld, said the stress of keeping up with repayments started just a week after taking out a $3000 loan from Cash Converters.

The interest rate was 49.95 per cent, a hair below the threshold for what’s considered a high-cost loan – 50 per cent. Vincent said while the 49.95 per cent rate isn’t officially high-cost, it’s “blooming high compared to someone who’s got a personal loan at 16 per cent from a mainstream loan”.

Natalie Vincent says people accessing high-interest loans have been excluded from mainstream banking.

“It’s extremely high interest for someone on a low income to manage.”

Josephine said because she needed a car for work, she felt she had no choice but to take on the debt.

“I had nowhere else to go to, no family to help get a vehicle for me,” she said.

But meeting the $90-a-week repayments quickly became untenable.

People accessing high-interest loans are the ones least able to afford it, Vincent said, but they’re left with no options because they’ve been “excluded” from mainstream banking. That could be because they have other debts, a bad credit history or a low income.

“I won’t be doing any more loans like that ever again,” Josephine said. An interest-free loan from Ngā Tāngata Microfinance paid off her debt, and she’s now repaying the loan straight from her benefit each week.

Without that she would have been “stuck”, she said, and “I’d be really in debt”.

Auckland mum-of-four Tanya did her best to pay off her loan debt before any bills, but the $140 coming out of her account each week left her with just $250 for groceries and bills.

It only took one other expense - car rego, an unexpected bill, clothes for the kids - and she’d get behind on payments. Each missed payment meant a $14 default fee.

Vincent warns it’s easy for spending to get out of control using buy now, pay later schemes.

Then Covid hit, and her dad moved in during lockdown.

“It was really, really, really hard that time,” she said.

After working with a financial mentor, she’s now saving some money each week.

People making repayments is not a sign they can afford the loans, Vincent said.

“When you look at the whole context of a person's situation, if you're on a low income, and you've borrowed $3000 at 49.95 per cent, there is no way that you are going to be able to meet all your other commitments, the math just doesn’t work.”

That’s also a concern when it comes to buy now, pay later schemes. Because it's an unregulated space at the moment, there's no affordability assessment, she said.

“If you have a buy now pay later, you keep making those payments and that's really looking good, so you could get another buy now pay later, or you might get your limit increased.

“What we know is that people will make the buy now, pay later payments to avoid the default fees, and then forgo making other payments, cutting food costs, not paying your power bill on time.

“Whilst they are interest-free and fee-free, it's very, very easy for that spending to get out of control.”

Vincent is expecting the impact of Christmas lending to become clear in the new year, when she’s anticipating an influx of referrals to Ngā Tāngata. In November, the service had already seen self-referrals via the website jump more than 500 per cent.

They’re urging people to reach out before they get tangled up with high interest loans.

“There's lots of places to go for help, there's MoneyTalks, there’s Sorted, there's us, there's Good Shepherd.

“There's no wrong door, if you've got financial concerns, and you want some support, knock on one of these doors, and someone will be able to help you.”

*Name has been changed for privacy reasons.