Dealing with debt: Your questions answered

I’m paying 20 percent interest on my credit card debt. How do I get the debt down?

If your credit card is in the red, look for a card with a lower-interest rate or consider a balance-transfer deal. These deals let you move the debt to another bank’s card and, for a fixed period, pay reduced or no interest on the amount transferred.

Low interest rates on balance transfers usually apply for six months. After that time, the card’s standard rate applies.

To make the most out of these offers, work out a budget to pay off your debt within the honeymoon period. Don’t use your new card until the debt is repaid – any purchases on it will usually be charged interest at the card’s standard rate.

Why are credit card interest rates so high?

That’s an excellent question. The Reserve Bank has dropped the official cash rate to 0.25 percent but consumers are still paying up to 20 percent – and sometimes more – on credit card debt.

Banks typically argue the higher rates for credit cards are justified because the debt is unsecured – unlike a mortgage, which is secured against your home – so it’s riskier lending. However, we think it’s hard to justify the steep rates being charged at the moment when general interest rates are at an all-time low.

Are there any limits on what lenders can charge?

Not when it comes to interest. The only exception is for high-cost, short-term loans, commonly known as payday loans.

Payday lenders can’t require customers to pay back more than twice the amount borrowed under a high-cost loan contract. A high-cost loan is one with an annual interest rate of 50 percent or more. So, if you borrowed $500, the amount you’d have to pay back would be capped at $1000.

If I’m struggling with my debt, what should I do?

Contact your bank as soon as possible. Banks – and other lenders – have obligations to act responsibly, and treat borrowers reasonably and in an ethical manner.

If you’re finding it tough to meet repayments, you can make a hardship application. Options include asking the lender to extend your repayment time or postpone repayments for a specific period.

Be aware that a repayment holiday isn’t a holiday from interest. It will continue to accrue so your loan will ultimately cost you more. Reducing repayments may be a better option, as you’ll still be chipping away at your debt.

Let your lender know as soon as you find yourself in difficulty. You can’t make a hardship application:

• after two months of being in default of your repayments

• if you’ve failed to make four or more repayments in a row

• if you’ve been in default for two weeks after receiving a repossession warning notice or a notice that you’re in default on your mortgage.

If you need help, free budgeting advice is available from MoneyTalks (freephone 0800 345 123). MoneyTalks is run by FinCap (the National Building Financial Capability Charitable Trust) with support from the Ministry of Social Development.

I’m thinking about applying for a personal loan. What information will I need to provide?

You’ll need to give the lender information about your income and expenses. This usually includes things such as payslips, bank statements, mortgage documents, loan contracts and insurance documents.

The lender will also look into your credit history and do a credit check on you. To meet its legal obligations, the lender needs to assess whether you can pay back the loan without getting into financial difficulties.

Always consider carefully what you’re taking on before signing up for a loan. Make sure you know:

• the total cost
  
• the repayment amount and frequency
• the interest rate and fees
• what happens if you miss a repayment
• how long it’ll take to pay off
  
• what happens if you want to pay it back early.
  

The lender must give you this information. If it doesn’t, it will be breaching the Credit Contracts and Consumer Finance Act, which sets out your rights as a borrower.

My son wants me to be a guarantor for a car loan. Why does he need a guarantor?

Some lenders require a third party to guarantee a new loan. This means the third party – in this case you – will be on the hook for the debt if things go pear-shaped. Anyone asked to guarantee someone else’s loan shouldn’t do so lightly. Don’t agree if you can’t make the repayments, or if you’re unsure whether you’ll be able to.

The lender also suggested my son take out payment protection insurance. Does he have to do this?

Lenders must have a good reason for requiring insurance. If they don’t, they can’t insist you get it. They must ensure any policy:

• covers reasonable risks
• doesn’t double up on insurance the consumer already has
• is manageable and won’t leave the consumer in substantial hardship.

Payment protection policies, which kick in if you lose your income because of illness, accident or redundancy, typically have numerous exclusions and can provide little value. Anyone offered this insurance should carefully read the policy to see what they’re getting for their money and whether it’s worth the cost. The answer may well be “no”.

You should also be aware the lender may get a commission from the insurer for selling these policies. Ask the lender whether this is the case.

What are my rights if I sign a loan contract but then change my mind?

If you take out a loan, you have a "cooling-off" period to cancel the deal.

The cooling-off period starts from when you’re given the written disclosure statement. This statement sets out your loan details including your repayments, the fees and interest charges.

If the disclosure statement is handed to you in person, you’ve got five working days to cancel. If it’s emailed, you’ve got seven working days. And if it’s sent to you by post, you’ve got nine working days from the date the statement was mailed.

Where the loan is linked to the purchase of a car – or another consumer good – you also have the right to cancel. However, if you’ve already taken possession of the item (for example, you’ve driven the car off the lot), you still have to buy it. That means you may have to find alternative finance to pay for your purchase if you can’t pay by cash.

If I’m being treated unfairly by a lender, what can I do?

Talk to your lender about the problem. If you can’t resolve things, you can take the matter to a financial dispute resolution scheme. All lenders must belong to one of the following four schemes:

• Banking Ombudsman
• Insurance and Financial Services Ombudsman
• Financial Dispute Resolution Service
• Financial Services Complaints.

You can check what scheme a lender belongs to on the Financial Service Providers Register on the Companies Office website.

If you think the lender isn’t acting responsibly, or has misled you, you can also complain to the Commerce Commission.