Beware of High Interest Christmas Loans: Families Worse Facing a Festive ‘Debt Spiral’
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 to work.
Both were quickly sent into debt spirals. Reimbursements absorbed most of their weekly expenses, leaving leftovers to cover food and bills. The inevitable missed payments resulted in more fees, more interest, more debt.
Natalie Vincent is concerned that struggling families will find themselves in similar situations this holiday season as they look for ways to deliver Christmas after a financially difficult year.
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Vincent is the Managing Director of Ngā Tāngata Microfinance, which offers interest-free loans to help low-income New Zealanders get out of difficult financial situations.
Many people are already struggling after losing their jobs or their hours due to Covid, she said. So Christmas rolls; people have had a tough few months of foreclosure, they feel due for a reward, and they want to celebrate with their friends and family.
The high interest loans and buy now, pay later programs put a seemingly indulgent Christmas within reach, with advertisements touting heaps of new gifts and promising to “take the stress out of Christmas.”
Levin’s wife Josephine, who requested that her last name not be released, said the stress of tracking repayments began just a week after taking a $ 3,000 loan from Cash Converters.
The interest rate was 49.95 percent, a hair below the threshold for what is considered a high cost loan – 50 percent. Vincent said that while the 49.95 percent rate isn’t officially expensive, it is “booming compared to someone who has a personal loan at 16 percent of a regular loan.”
“It’s extremely high interest for a low-income person to manage. “
Josephine said that because she needed a car to work, she felt she had no choice but to go into debt.
“I had nowhere to go, no family to help me find a vehicle,” she said.
But meeting the reimbursements of $ 90 per week quickly became untenable.
People who access high-interest loans are the least able to afford it, said Vincent, but they have no options because they have been “left out” from mainstream banking. This could be because they have other debt, bad credit, or low income.
“I will never do loans like this again,” said Josephine. An interest-free loan from Ngā Tāngata Microfinance paid off her debt, and she now repays the loan directly from her allowance each week.
Without it, she would have been “stuck”, she said, and “I would be really in debt”.
Auckland mother of four did her best to pay off her loan debt before any bills, but the $ 140 that came out of her account each week left her only $ 250 for groceries and bills.
It only took one other expense – car renovations, an unexpected bill, clothes for the kids – and she was reportedly behind in payments. Each missed payment meant a default fee of $ 14.
Then Covid struck, and his father moved in during the lockdown.
“It was really, really, really hard this time around,” she said.
After working with a financial mentor, she is now saving money every week.
People paying back is not a sign that they can afford the loans, Vincent said.
“When you look at the whole picture of someone’s situation, if you have low income and have borrowed $ 3,000 at 49.95%, there is no way you can meet all of your expectations. other commitments. , the math just doesn’t work.
It is also a concern when it comes to buying now, paying later. Because it’s an unregulated space at the moment, there is no assessment of affordability, she said.
“If you have a Buy It Now, pay later, you keep making those payments and it looks really good, so you can get another Buy It Now and pay later, or your limit can be increased.”
“What we do know is that people will buy now, pay payments later to avoid default fees, then forgo making other payments, cut food costs, not pay their bills. electricity on time.
“Although they’re interest-free and cost-free, it’s very, very easy for these expenses to get out of hand. ”
Vincent expects the impact of Christmas loans to become clear in the New Year, as she anticipates an influx of referrals to Ngā Tāngata. In November, the service had already seen self-referrals through the website jump by more than 500%.
They urge people to reach out before they get tangled up with high interest loans.
“There are a lot of places to go for help, there’s MoneyTalks, there’s Sorted, there’s us, there’s Good Shepherd.
“There is no wrong door, if you are in financial trouble and want support, knock on one and someone can help you. “
*The name has been changed for confidentiality reasons.