Taking on too much debt is a major cause of financial stress which particularly affects people with low levels of financial literacy but also those who have a strong urge to spend now and pay later for lifestyle reasons. There are many reasons why people go into debt. Sudden changes in income or spending can lead to debt, but also subtle pressure from lenders and retailers to borrow and spend more. Credit can be too easy to obtain. Sale prices can be too tempting to ignore. Then there is peer pressure to have the latest – whether that is technology, cars, fashion or beauty treatments. Mobile traders frequent low socio-economic areas offering goods for sale on payment terms with high interest rates and fees.

Low or no interest lending offers can seem like an attractive deal until the deal interest period runs out and the penalty interest kicks in. Short term debt has a huge impact on weekly cashflow, which may be manageable when there is steady income and outgoings but crippling when income drops or mortgage repayments suddenly increase with rising interest rates.

Lenders are bound by a major piece of law – the Credit Contracts and Consumer Finance Act – which offers protection for consumers when borrowing money. From 1 December, 2021, a number of changes have been made to this Act in order to raise the standard of lenders and to better protect borrowers from harmful lending practices. The key changes are:

1. Consumer credit providers and mobile traders must be certified by the Commerce Commission and registered on the Financial Services Provider Register.
2. People who are directors or senior managers in consumer credit providers and mobile traders have a duty to make sure their organisation is complying with the Act, and they face heavy personal fines if they breach this duty.
3. There are additional disclosure requirements around financial mentoring, dispute resolution and debt collection. As part of these requirements, lenders who advertise in a language other than that of their loan agreement may now have to offer information about the agreement in that language
4. In order to promote responsible lending, lenders will now have to ask for more specific information from borrowers around their needs and the objectives of borrowing. When there are material changes made to a loan agreement, lenders will need to do an assessment of the borrower.
5. There are more controls on advertising and fees charged by lenders. Advertising must not be misleading, deceptive or confusing. Lenders must be able to show that their credit and default fees are reasonable.

Of these changes, the most significant implications are in the area of responsible lending. Lenders must keep records which show that the loans made to a consumer are both affordable and suitable and that the lending fees are reasonable. Lenders are also prohibited from entering into a high-cost consumer credit contract with a borrower who has entered into two high-cost loans in the last 90 days.

What can borrowers expect from these changes? They can expect to have to provide more information to lenders to demonstrate that the proposed borrowing is affordable and suitable. Lenders are likely to apply more scrutiny to spending and borrowing patterns of loan applicants as well as their future income prospects. If you lack skills in money management or you are a shopaholic, you can expect that to impact on the amount of money you can borrow. First home buyers should be able to demonstrate the ability to save and to keep short term debt such as credit cards, store cards to a reasonable level.

Those on low incomes, including retirees, may find it more difficult to borrow for affordability reasons, particularly in the face of rising interest rates.

While these measures may seem invasive and restrictive, all they are doing is bringing about the money management behaviours that we know deep down we should have, but which we are inclined to ignore.

This is a very timely reminder of good money management as we approach the holiday season and especially with the prospect of higher interest rates next year.

This Christmas, the Retirement Commission is working with some of its National Strategy partners to drive home the message ‘spend safely this Christmas’. Now is the time to be reducing debt and building up savings for the tough times ahead.