In whose interest?

People told to lie on a credit check, door-knocking mental health clients and 400 percent interest rates ... These are some of the stories Salvation Army budgeters deal with every day, which keep people trapped in a cycle of poverty. In the first of a two-part special investigation, Robin Raymond lifts the lid on the loan shark industry, and how The Salvation Army is at work. Then,  in the next edition, find out about our daring new project to disrupt the industry for good.

We knew they had our head in a noose, but there was no one else we could go to—we tried everyone,’ says Sheryl*. Sheryl and Tim’s* problems began innocently enough in April 2013,  when their car broke down. Tim needed a car for his business, so he traded it in for a new one. Then in August, Tim got sick—so sick he nearly died, twice.

It took eight months before he  could get surgery and his recovery is ongoing. Unable to work, his business went under, leaving large debts to suppliers—along with the car they were still paying off. ‘It got us into a lot of  rouble and we went very deep,’ he says. They ended up with debts of around $50,000—some of which they are still paying today.

With the car about to be reposessed, they turned to the only place that would take them: a short-term loan company. ‘The interest was 400 percent. We went ahead knowing that we would have to pay it back, but at least we had cash to pay our creditors,’ Tim says.

‘They didn’t ask questions and they gave us cash,’ adds Sheryl. ‘All they wanted was to see our bank statements and make sure we could pay them back.’

In the end, they took out four  loans totalling $1770—plus interest and other fees. Despite never missing a payment, it took them thousands of dollars more, and over three years, to pay off.

It was the support of  Damien Hazelwood, a financial mentor with Salvation Army Community Ministries in Porirua, who got them through. ‘We call [Damien] our guardian angel. Without him we would have lost it all. He’s gone over and above for us. All of our main creditors are now gone, thank God. I’m sure it was more to do with the prayers. We had miracles, small miracles, so many  times,’ Sheryl says. For Damien, the amount of debt Tim and Sheryl had was unusual, but the story wasn’t. He reckons, ‘about 95 percent of the people we see to do a budget will have debt’.

With illness, job loss and urgent debts, Sheryl and Tim ticked three common reasons people turn to the industry that’s officially known as ‘third-tier lenders’.

When you have nowhere else to turn …

These companies will lend you money when you can’t get a loan from the bank. They are set up to make money out of lending to people who don’t have enough to live, and can’t get money any other way.

It’s a popular industry. For the past two years, one of the 10 fastest growing companies in New Zealand was a pay-day lender, offering cash loans of up to $5000 in under an hour (with interest up to 620.5 percent). In four years, it made 160,000 loans—that’s about 110 loans a day.

Ronji Tanielu, a policy analyst with The Salvation Army’s Social Policy and Parliamentary Unit (SPPU), who has a long history of working in this area, says the industry thrives on a toxic mix of poverty and a lack of other options.

‘These companies are experts and working within the parameters of the law. Their clients are people who are desperate, people who simply don’t have enough money coming in to afford the basics of life—let alone to break the cycle of their poverty. And they often don’t have the financial literacy to work through very complicated credit and lending contracts.’

The companies range from the one Tim and Sheryl borrowed from, to those who straight-up break the law. Stories from Salvation Army financial mentors include a pawn broker telling a man to fake his earnings on a credit check, and companies that target people living in cars and mental health homes.

In response to these appalling situations, The Salvation Army offers a Community Finance Scheme, providing low interest loans to people often targeted by the ‘loan sharks’. Former manager Jodi Hoare says some of the stories are heart-breaking.

‘There was one young lady I worked with, she’d pawned a sentimental ring for a tiny bit of cash. The ring was worth about $2000 and she’d pawned it for $200 cash and was trying to pay off the loan to get it back. By the time I saw her, it was three months down the line and I worked out there was no way of her ever paying off that debt. I had to say to her, “I know it’s sentimental, but you’re going to have to let it go”. The idea that someone would be in that situation, and that someone would do that to another person, stuck in my mind.’

In whose interest?

One of the easiest ways for lenders to make money is through high interest. Many countries put a limit on how much interest you can charge on a loan. In Australia, for example, you can’t charge over 48 percent interest on anything. In some countries, the interest cap on short-term loans is as low as four or five percent. In New Zealand, there is no limit. Last year the Commerce Commission found a company charging 803 percent interest.

Lenders also make money by adding fees for different services. When the Commerce Commission surveyed 215 lenders last year, it found more than 500 different fees being charged, from five dollars to $5000. Third-tier lenders add fees for everything, from starting your loan, to updates on how much you have left to pay. Sheryl and Tim were charged $55 each time the car company sent them a notice threatening to repossess their car.

Businesses are often set up to keep clients hooked on the loans. Tim and Sheryl’s lenders ran a points system, where the more you borrowed and re-paid the more points you ‘earned’— with the promise that once you earned enough points your interest rate would go down.

Third-tier lenders can be relentless in chasing up for more, too, ringing people every night or turning up at the door over and over again. One of Damien’s clients told him the first message she had on her birthday was a text from a pawn broker she had a debt with, encouraging her to come in and buy more items on credit as a birthday treat.

The complicated cycle of debt

Then there are the setups between complicated networks of companies, each getting a cut from the debt. Royal Oak Community Ministries Financial Mentor Andrew Mitchell describes the case of Mike*. He wanted to buy a car, but the car yard decided he was too risky to sell to, so they referred him to a car loans broker.

The broker put Mike onto a finance company, which gave him a loan and encouraged him to purchase two extra forms of insurance. For his $14,500 car, Mike ended up with a $17,484 loan (before interest) to four different companies.

The business model is to find someone who can’t pay, take as many payments as they can, and once they can’t get any more, repossess the car, leaving people with a huge debt. The car is then sold to the next desperate person and the cycle repeats, Andrew says. ‘Every experienced budgeter will have seen a case like this.’

In the four months before Mike ran out of money, he paid almost $5000—but his loan balance only went down by $1020. The car was repossessed and sold (for $9500 less than Mike bought it for) to help pay his debt. The remaining $11,350 debt was then sold to a fifth company—a debt-recovery agency. This can sometimes be the cruellest part of the debt cycle: a recovery agency can, entirely legally, pursue the debt in court making it even harder for the person to get a loan in the future.

A voice for the voiceless

When they find things that are illegal or seriously questionable, SPPU and Salvation Army mentors take cases to the Commerce Commission. Andrew took two cases that were similar to Mike’s to the Commerce Commission last year. Others can go to disputes resolutions—although this only works if the company is signed up with the Financial Service Providers Register. One study found that 41 percent of providers weren’t even registered.

For many it’s just a slow grind to pay off their debt. Every month Damien would go over Tim and Sheryl’s finances—sometimes sitting round their dining room table into the evening after a full day of work.

‘First he sat down with us and went through all our debts. That came out to one awful lot of money. He worked out, “This is your income, this is what you can do”. He helped us set up a cash book and we write everything down and work to a budget, I think we’re up to cash book 14 or 15,’ Tim says.

He arranged food parcels when they couldn’t afford groceries, and called creditors, pleading with them to defer or reduce payments on hardship grounds. They’ve all sat with their heads in their hands countless times, and prayed together many times, Sheryl says. Even today, Damien is still helping the couple on and off, going with Tim to WINZ and providing advice to deal with their high (and rising) rent.

That’s the job, Damien says, helping people build plans to pay off debt and fighting in their corner against a big industry.

The road to reform

Ultimately, though, the system needs new laws to protect the vulnerable, Ronji says. Tim and Sheryl agree. They’re firm that they would never borrow from a pay-day lender again, but they say they don’t have a problem with the company they borrowed from

. ‘We’re not saying these lenders are bad people, but they were the only option. Something needs to come out that helps people,’ Tim says, ‘there is a need for lenders like this but the interest needs to be capped at 100 percent and that’s got to include all fees.’

The government has announced it will be overhauling the Credit Contracts and Consumer Finance Act, which governs the industry. And last year it put out a proposal suggesting capping interest rates and lending fees, requiring more thorough credit checks before giving a loan and making sure the law applies to mobile shopping trucks.

For Ronji, who has been campaigning for change since 2013, it’s another step on a long road to reform. ‘The government has said some really nice things, but it’s going to take a lot of bravery to do some of the things we have asked for. We, as a community and church sector, are fighting a giant here in the finance industry.’

* Names have been changed.

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(c) by Robin Raymond 'War Cry' magazine, 9 February 2019 p6-9 You can read 'War Cry' at your neares  Salvation Army church or centre, or subscribe through Salvationist Resources.