The online credit loophole must be closed
OPINION: Years of motorcycle crashes are catching up with me.
Last week I spent a few days asking medical professionals to push, push and x-ray my knees to find out why it hurts like Billy-oh when I go up the stairs.
The technical name for the disease is patellar instability, but the funny radiologist asked me if I had taken too many loans with “knee cap financing” and if I had big problems in the middle of the night with it. lead pipes.
While this term is fun for those who have never used third-level lenders, many people do not have the assets to deal with banks (first-level lenders) or credit unions ( second level lenders).
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Instead, they have to rely on the personal finance companies, pawn shops, and mobile loan trucks that make up the bottom of the third tier.
Typically, these businesses focus on people without an adequate credit history, such as low-income people, immigrants, and beneficiaries, and emphasize the timeliness of cash loans. Often without disclosing the costs and conditions of reimbursement, or the punitive implications for those who do not meet these conditions.
Six months ago I wrote about the colorful traders inhabiting this tier and a friend’s experiences trying to get out of debt with short term loan provider Superloans.
At the time, I noted Consumer Minister Kris Faafoi’s promise to clean up the third tier landscape with his review of the Consumer Credit, Contracts and Finance Act.
Last week the Faafoi review came out and there is welcome relief for those with little choice.
Interest and charges on personal loans will be limited to 100% of the amount borrowed.
So if you borrow $ 5,000, you’ll never have to pay back more than $ 10,000, including fees and interest. This will avoid the current situation where people can accumulate large, uncapped debt from just one small loan.
There is a new “fit and appropriate person” test for key industry positions and tougher penalties for reckless loans.
To be clear, the changes are good and consumer-centric. But reading them last week, I couldn’t help but think that they had missed a tip regarding the growing number of online shoppers now, pay later.
The big ones in this market are Zip Pay, Openpay and Afterpay. All of them provide consumers with a service to buy it now, receive it immediately, and pay it back on time between retailers and customers.
Afterpay is the current hottie. The Australian company was launched in 2015 and is today valued at A $ 2.6 billion (NZ $ 2.8 billion). It allows consumers to make a purchase and pay the money owed in four equal installments, due every two weeks.
While the service is interest-free – the retailer pays to help increase sales – it charges consumers a fee for late payments.
There is a late fee of $ 10 for missed payments, plus an additional $ 7 if payment is not paid within the week up to a maximum of $ 68.
Here in godzone, its adoption has been as quick as it is quiet, from big box retailers like Farmers, to premium players like Icebreaker and Witchery, to e-commerce giant Trade Me.
It was not all rosy. Across the divide in Australia, it has been reported that up to 25 percent of Afterpay users suffer from financial stress, with a third of consumers missing at least one payment. That’s a lot of late fees.
This comes after the National Debt Helpline reported that it was receiving more and more complaints from consumers using Afterpay.
Closer to home, Afterpay users on Trade Me suffered an incorrect charge.
Users of the “buy now, pay later” service were overcharged in late August after a processing issue caused buyers to be billed twice after purchasing items from Trade Me.
To be clear, I don’t see Afterpay as a digital cousin of ball-joint finance. But its growth shows that in the digital age, third-tier lenders are increasingly likely to be virtual rather than on the main street.
In the case of Afterpay, the finance company does not perform a credit check when you sign up. So there is no checking to see if it meets your needs or if you can afford to pay it back in 120 days.
This raises the question of whether the revision of the law on credit, contracts and consumer finance has been sustained. Currently, buy-it-now and pay-back programs are not covered by law. And nothing in the review’s recommendations suggests that will change.
On the other side of the divide, the Australian Securities and Investments Commission has pledged to expand credit laws to cover the buy now, pay later industry. Specifically, they will broaden the definition of credit.
Most of my motorcycle injuries didn’t happen during races or trans-world travel, they were close to home so I’m just not aware of the risks I’m taking.
Do a better job of reporting buy now, pay later programs, as personal loans could mitigate the same risks in the personal finance markets.
Mike “MOD” O’Donnell is a professional manager, advisor, and failed motorcycle racer. His Twitter handle is @modsta and he’s pretty attached to his kneecaps.
* An earlier version of this column incorrectly stated that Zip Pay does not perform credit checks on new customers.