In the last three months, changes to NZ credit laws have put borrowers under more scrutiny. How have these changes affected the fast cash loan market?
It has been widely reported that many borrowers are being declined mortgages for trivial reasons like uber eats and therapy. Many stories are circulating within the NZ loans industry that have people shaking their heads. Examples of people who have been turned down for a home loan include someone who spent $187 on Christmas presents at Kmart, purchased one lotto ticket in three months, spent money on Netflix, and ate takeout twice a week.
Murray Greig, Managing Director of Loansmart, a loans company based in Auckland, answers a few questions that personal loan applicants have about the changes to the credit law.
How are changes to lending laws affecting the average personal loan borrower?
A few people have been affected by the changes, but not an overwhelming amount. Our company was already checking for affordability by analysing bank statements.
Because 80% of lending is unsecured, you are not going to lend to someone who can’t afford to pay. Since the changes, you must also demonstrate a buffer in case of unexpected expenses.
You can, but you need to be organized. Prior to the new changes, 25% of Loansmart’s loans were approved the same day, 22% last month, and 18% this month.
In light of the new NZ loan laws, lenders are exercising greater caution, as they face severe penalties if they don’t follow them correctly. So they are taking a little longer when assessing applications.
By providing access to your statements and answering any questions your Personal Loan Consultant has straight away.
These changes were intended to protect vulnerable people from loan sharks. But there is concern that it is having the opposite effect.
These changes don’t just affect home loans, but essential items like motor vehicles and household appliances. Restricting people’s access to funds severely impacts their ability to fulfil their basic needs.
In the event that they cannot obtain a loan from a well-established and responsible lender, where do they turn?
No. This has been the case since May 2020. Borrowers must provide three months’ worth of bank statements.
They were already required to prove that they can repay the loan. Now, you have to show that you’ll have a surplus after repaying your loan, so you can cover unexpected expenses as well.
By being organized! It’s also important to choose a lender that is organized too, has enough staff to quickly analyze your statements and has software that makes it easy to do so.
Loansmart sends applications a secure link that enables them to easily provide access to their bank statements. An experienced lender will then look at the statements to ensure the applicant can afford their repayments.
If they meet the affordability criteria, they are approved the same day.
The Financial Service Federation wrote to the Government, asking it to investigate the effects of these changes on consumers needing personal loans.
They point out the changes are unnecessary since the new laws introduced in May 2020 already drove out a large number of ‘loan sharks’, or payday lenders as they are also known.
The number of high-cost lenders reduced quite quickly from around 60 to about seven. This is because they cannot charge more than 100% of the total cost of the loan including fees.
They were also required to make reasonable inquiries into a borrower’s financial situation to make sure the borrower could repay the loan without significant hardship. They risk a $600,000 fine if they cannot prove they have done this. So with increased risk to lending by way of penalties, and less income by way of caps, many chose to exit the market.
Loan book arrears were already down by 25%. In 2016 the percentage of loans in arrears was 5.8%. In 2021 this had reduced to 4.4%, so it clearly shows that lenders were exercising due caution when assessing people’s ability to repay loans.
Many feel that the changes are an overreaction to a problem that wasn’t really a problem, and they affect all borrowers, not just the more vulnerable. The original legislation did not require any changes if it was upheld correctly.
Now, however, everyone who signs off on loans faces the possibility of being personally liable for fines of up to $200,000, not just the company they work for. Whenever you sign off on a loan as a lending manager, this is always in the back of your mind. This is why they are exercising more caution than ever before, and you hear all of these stories about loans being declined for trivial reasons.
NZ borrowers can still get fast cash loans, and it is possible to get them approved the same day, but you must be ready to provide bank statements and work with your consultant to answer any questions they have. You must also be able to demonstrate that you can afford the loan, and have a buffer to fall back on in the event that you face unforeseen expenses.