Low interest rates have been drawing people in to taking credit to spend on all sorts of things, which has been great for helping the NZ economy get kick started after the nationwide lockdown last year. The thing that is less talked about is the fact that the debt needs to be repaid!!
The CCCFA (Credit Contracts and Consumer Finances Act – we blogged about it here) has been changing over the last 12months with the final changes taking effect from 1 October 2021. However, many lenders are not waiting until then to adjust their rules to meet these new Responsible Lending regulations. The rules are meant to protect people from securing debt that they cannot afford. These new rules are great for protecting those who have a tendency to just keep borrowing more to live a lifestyle that they can’t really afford. There are still lenders like LayBuy and AfterPay that fall outside of the new rules – if you can afford to pay the short-term loans off within the agreed timeframe that is great, but if you overstretch you can find yourself caught in the credit trap.
While the Responsible Lending Code changes are meant to be protecting people, those that have high interest credit cards and loans may find themselves trapped. The original lender will have needed to meet the lending rules of the day and have accepted the risk at the time, but a new lender may not be comfortable to take on the risk even if it will mean the client will be better off. For example, if you have a high interest credit card (say 26%) and you want to do a balance transfer to a credit card with 12.95% interest or interest free, the Lender is obliged to act within the Responsible Lending Code and therefore may feel that they are unable to approve your finance request due to your financial stress, although clearly you would be better off than you currently are, and may have been meeting the payments at the higher rates!
Another gotcha is the way that the lenders assess household costs. More attention is being paid to what your actual costs are, as well as assessing you against the lender standard household costs. One tricky aspect of this is that even though the household costs may be shared in a partnership where two people within the household run their finances totally separately, when one partner is seeking finance for whatever reason the Lenders are looking to confirm that both parties can afford their share of the costs. This is regardless of the second partner not being party to the lending application. This can be a showstopper!! Navigating this process is going to require patience and attention to the details.