The government has announced extra measures to protect people against loan sharks.
Commerce and Consumer Affairs Minister Kris Faafoi. Photo: RNZ / Dom Thomas
An interest rate cap will reduce how much it costs to borrow money.
Commerce and Consumer Affairs Minister Kris Faafoi announced that an interest rate cap of 0.8 percent day - or 292 percent per annum - will be included in the bill going through Parliament at the moment.
In April, the legislation was introduced to Parliament to protect people against loan sharks, but during the select committee stage, the bill was criticised for not going far enough.
Mr Faafoi said there were more than 400 submissions on the bill and about 85 percent of them called for more to be done on interest rate caps.
The bill already includes a cap on the total cost of borrowing, which means people taking out high-cost loans will never have to pay back more than twice the amount they originally borrowed, including interest and fees.
In addition, all truck shops and other mobile traders will be required to check that credit is affordable and suitable for each customer before providing anyone with goods that aren't paid for upfront and to provide information to help borrowers make informed decisions about whether to sign up for credit.
The legislation is expected to pass this year and will come into effect in stages, starting in March.
"At the moment, high-cost credit is too easy for people in hardship to access. While this type of credit can be an immediate solution to financial problems, we know that high-cost, easy credit leads to worse problems in the long run," Mr Faafoi said.
"I know that some lenders are already referring customers who are struggling with repayments to financial mentoring services and this is good to see because it ensures that those struggling with debt can access the advice they need to get back on their feet. I encourage other lenders to follow this example. We are changing the law so that this can become a requirement in future, if needed."
He said the interest rate cap would strengthen protections for vulnerable borrowers, and combined with the cap on the total cost of borrowing, it would help keep them from spiralling into debt.
Mr Faafoi said there were some lenders offering loans at interest rates of just under two percent per day.
"That will effectively halve the speed at which some of those interest rates can accumulate and become bigger," he said.
"I think that will make it more manageable for people to potentially deal with that debt or that interest."
The measures would be reviewed in three years, Mr Faafoi said.
FinCap chief executive Tim Barnett welcomed the announcement, although they had advocated for a lower interest rate cap of 50 percent per annum.
"That's still a high rate but it will take the most predatory debt products out of the market," he said.
"High cost short-term lending takes around $120 million a year out of the pockets of low income New Zealanders. That comes at the expense of basics such as food, housing, and electricity."