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Payday lenders in New Zealand

Tuesday 23 October 2018, 11:11AM

By Zebra Loans

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With the Commerce Commission and the new Labour government looking set to introduce new lending rules to regulate payday loans, are interest rate caps the solution?

What is a 'Payday Loan'

A payday loan in New Zealand is a type of short-term borrowing where a lender will extend high interest credit based on a borrower’s income and credit profile. A payday loan’s principal is typically a portion of a borrower’s next paycheck, however in New Zealand they appear to short term loans that have attracted the name of payday loans, without any wage collateral. These loans charge high interest rates for short-term immediate credit. These loans are also called cash advance loans or check advance loans.

Obtaining a Payday Loan

Payday loan providers are typically small credit merchants with physical locations that allow onsite credit applications and approval. Some payday loan services may also be available through online lenders.

To complete a payday loan a applicant must apply online including their current levels of income. Payday lenders often base their loan principal on a percentage of the borrower’s predicted short-term income. Many also use a borrower’s wages as collateral. Other factors influencing the loan terms also include a borrower’s credit score and credit history which is obtained from a hard credit pull at the time of application.

Payday Loan Interest and fees

Putting interest rate caps on payday loans is among the priorities for Labour's first 100 days in office.

And Commerce and Consumer Affairs Minister Kris Faafoi, who pushed for caps when in opposition, has instructed officials to look at how low New Zealand's payday loan interest rate caps should be.

Currently, high-interest, short-term payday loans can sometimes attract interest at a rate of 1.5 per cent a day, though there is no legal maximum.

Payday lenders charge borrowers extremely high levels of interest which can range up to 600% in annual percentage yield (APR). The recent Supreme Court case of sportszone and MTF demonstrates a crack down on how all lenders may charge credit fees.

Worldwide interest rates appears to be controversial. In 2014, the World Bank studied interest rate caps and found them to be "popular", but "blunt" instruments with 61 of the 152 countries in the "World Bank region" having them.

Whether these caps will make their way into New Zealand law remains to be seen.