Debt and child poverty

A new report from the Child Poverty Action Group out today demonstrates the impact that debt has on exacerbating child poverty.

The report highlights the high cost of credit for people on lower incomes, due to bad credit ratings:

Once access to mainstream lenders is lost and friends and family are unable to assist, people on low income may resort to loan sharks. Because they will be charged an annual interest rate of 25% to 500% or more, plus administration, they may be trapped forever by the debt.

“Or more” can have a pretty broad definition – in 2012 a loan shark was prosecuted by the Commerce Commission for charging interest rates of up to 1,738%. He was charged under the Credit Contract and Consumer Finance Act for failing to disclose the full name and address of the lender, failing to specify interest rates, and misleading consumers as to the method of calculating the interest rate.  This notwithstanding, these breaches were with regards to how the lending was done – there is currently nothing in NZ law from stopping a loan shark setting interest rates at these levels.

Next, the report goes on to highlight how other countries ‘cap’ interest rates on loans. Australia caps interest rates at 48%, and while the UK has no cap the new Financial Conduct Authority will soon have the authority to take action against behaviours that harm consumers. In 37 states in the US payday lending is legal but regulated, with maximum rates set. 21 EU states have all incorporated the concept of ‘usury’ into the civil and criminal codes. Japan, South Africa, Canada and Ireland all impose caps. NZ is lagging behind – the Credit Contracts and Financial Service Law Reform Bill 2013 currently before the house has no provision for interest rate caps.

The report goes on to provide five case studies, breaking down the day-to-day arithmetic of poverty and debt:

  • A ‘good’ debt story where a couple take on a loan at 5% to buy a house, repayable in twenty years.
  • A single person with a student loan.employed 35 hours a week on minimum wage ($407.70 per week after tax). She takes on an overdraft to purchase a TV and stereo and purchases an iphone and work clothes on her credit card. When her father dies Anna takes on a $2000 loan at 39% to contribute toward the funeral costs, with $70 repayments for the next 18 months. 3 years layer she has moved home to reduce outgoings, since every missed repayment incurs a $400 administration charge and a 55% penalty rate.
  • A family of two adults (together working 30 hours at minimum wage) and two children assisted by Working for Families are forced to call on a fringe lender to cover medical, power and clothing costs. They borrow $400 at 10% a week with a 10% admin charge. In 10 weeks they have repaid $500 but the loan is still $344.12. After needing to borrow more and then missing repayments, their debt balloons to $2000.
  • A single mother on the DPB with three children (not working so does not qualify for in-work tax credit) who is suffering from depression misses job training and refuses to attend an interview, forcing her to call on the fringe lender.

The report details how child poverty affects NZ’s mental health (such as NZ’s high youth suicide rate), physical health (diseases like rheumatic fever, bronchiectasis, school sores and boils are associated with poverty), housing (cold, overcrowding), education and lifetime prospects.

How does this relate to banks? Banks and loan sharks have a symbiotic relationship. Where a customer cannot make their bank repayments, banks’ debt collection services encourage their customer to seek capital from other sources – family, friends and other lenders such as loan sharks. As a result customers can end up paying two sets of interest – to the bank on the initial loan repayments and to the loan shark.

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