Loan shark crack down by Government

Kris Faafoi announced:

“The introduction of an interest and fees cap on high-cost loans will prevent people from accumulating large debt from a single small loan. For example, if you borrow $500 you will never have to pay back more than $1,000 in total, including all fees and interest.

Overall this seems a good step. Most loan sharks prey on people in difficulty and sign them up to exploitative stuff such as 25% per week interest.

However there is a risk of unintended consequences. The cap may become the default. It might lead to some lenders increasing their rates.

Also there may be no incentive to every pay a loan back once the cap is reached. Let’s say you borrow that $500 and don’t repay it and eventually you owe $1,000. Then you can never be charged any more interest so why repay?

“The changes also lift the level of professionalism across the industry, by requiring directors and chief executives of lenders offering consumer credit contracts to pass a ‘fit and proper person’ test in order to register as a Financial Service Provider.

That seems worthwhile.