FSF Supports Shrink Your Dumb Debt Campaign

Media Release
9 July 2012

Financial Services Federation Response To Shrink Your Dumb Debt Campaign

The Financial Services Federation (FSF) is supportive of the Commission’s latest promotional campaign aimed at getting New Zealanders to shrink their “dumb debt”.

Through its Responsible Lending Guidelines, FSF members strive to ensure that consumer finance they provide to New Zealanders is manageable in terms of repayment and will not lead the consumer into undue hardship situations.

The point of the Commission’s campaign is to help the public to understand the cost of borrowing and to get them to think about alternatives such as delayed purchase until they have saved the money necessary.

These aims and that of encouraging consumers to think twice before taking on debt such as that on credit cards that allows them to live beyond their means and which is not paid back in full each month are admirable said FSF Executive Director, Lyn McMorran.

The reality for a large number of New Zealanders however is that they would be unable to obtain necessary equipment such as a motor vehicle or washing machine without borrowing to purchase them and waiting until they have sufficient savings is not realistic when their need is immediate.

As an example, our members estimate that they finance the purchase of at least 55% of motor vehicles purchased through dealerships with which they are associated. (This figure would not include vehicles purchased with finance obtained from banks or through family loans.)

It is certainly true that a motor vehicle is not an asset which appreciates in value but as Lyn McMorran points out, it is often the only means by which New Zealanders can get themselves to work, pick up and drop off their children at school or daycare, take them to the doctor when required etc.

Not everyone is able to add the cost of a vehicle purchase to their home loan to reduce interest rates either unless they actually own their own home and have sufficient equity to add the cost of a vehicle to the mortgage they already have. People taking this option to finance a vehicle also have to be careful not to extend the term of this finance beyond the useful life of the vehicle being purchased McMorran said. It can cost considerably more to repay a $10,000 debt at 5.60% interest over 20 or even 10 years than it might to repay it over 3 years at 13% per annum. Also if the life of the vehicle is only 5 years, you are left paying for a vehicle you no longer own when you need to purchase a replacement.

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