What Difference Will the Credit Reforms Make?
Case Studies - What Difference Will the Credit Reforms Make?
Case study 1
I borrowed $4000 from a small finance company and I have to pay a $1000 establishment fee and 11% interest. Other similar finance companies usually charge an establishment fee of $350 or less.
What difference will the reforms make? Under the new law, establishment fees must not exceed the cost of approving the application for credit, setting up and documenting the loan.
Case study 2
I bought a car on hire purchase and they have charged me $90 for a Motor Vehicle Security Registration fee, but I thought the cost of registering a motor vehicle security is only $11.
What difference will the reforms make? Under the new law a lender can pass on the cost of a fee it has paid to a third party, but it must be the actual amount paid to the third party.
Case study 3
I've borrowed $10,000 from a lender at 26% interest (no fees) payable over 3 years (monthly payment $402.91). My friend borrowed the same amount, also at 26% and also for one year, from another lender. After 12 payments he owes $7478.60 and I owe $7640.67. My contract says nothing about how interest is calculated.
What difference will the reforms make? In the above case, one lender has used the old Rule of 78 to calculate the balance. The new law prohibits lenders from using the Rule of 78 and from charging interest in advance. Interest must be calculated in relation to a daily balance. Lenders must also disclose in the contract their methods for calculating interest.
Case study 4
Lender J has never bothered to follow the Credit Contracts Act. He doesn't provide written contracts and carries out practices that might be considered oppressive eg taking the ATM cards of borrowers as security. Surely he is not fit and proper to be in the lending business?
What difference will the reforms make? Under the Credit Contracts Act people such as this can be banned from lending. However, the Act has no teeth and has never been put into action on this point. This is because no public agency has been empowered to enforce the law. This will change this if the Commerce Commission has the role of enforcing credit law.
Case study 5
A consumer borrowed $2,500. With finance charges, the amount to be repaid was $3,500 over three years. They decided to settle early and the settlement figure was $2,581.75. Two years later, they received a bill for $888, calculated as 24% on $2,581.75 – the problem was they forgot to pay the 75 cents but interest was charged on the $2,581.75.
What difference will the reforms make? Under the new law, if the lender accepts the early payment, they must provide credit in some form to the borrower. The term of the loan may be shortened, the size of the payments may be reduced, or payments may be deferred. However, lenders cannot simply apply the payment to the principal without reducing the “upfront” interest charge.