Imagine this. You’re a parent with three children, and your partner has a serious health condition that requires fulltime care. You have a very tight budget, live very frugally, and understand exactly where every dollar goes.
You have an impeccable credit rating but don’t qualify for mainstream lending due to your low income level, and you lack the confidence to visit the bank and have a conversation about money.
You need a reliable vehicle and have been approved for a loan at a local car yard but understand that the cost of the loan is not the best use of what little money your family has to spend – approximately 30% interest rate plus fees.
Imagine this. You’re the parent of a child who is unexpectedly taken ill and requires ongoing medical attention in hospital. You’ve got some debt that you took on while working full time, but having to cut back on hours to take your child to and from the hospital means that these debts quickly become unsustainable. You default on the loan and as a result get a bad credit rating.
You have made arrangements to repay the debt and are committed to an on-going plan to pay it back over time, while still caring and providing for your sick child and family. Banks or mainstream lenders won’t help because you don’t meet the credit criteria. It feels like an uphill battle with no end in sight.
These are the stories of real New Zealanders, and they are not out of the ordinary. Many people struggle day to day to make ends meet and are limited in where they can turn to get loans that don’t come with extortionately high interest rates.
Every day we deal with a huge range of customers and potential customers from all along the financial spectrum who apply for loans. There are people who, under our traditional banking model, we can’t help, and usually this is because they have minimal incomes or don’t meet credit criteria for other reasons.
We believe there’s a group of New Zealanders who fall into this category, who are actually very good at budgeting and are committed to paying back debt. The trouble is, because they don’t often meet the traditional banking criteria, they end up turning to loan sharks and pay day lenders, who charge crippling interest rates and fees.
We want to work with our Community Finance partners to offer them a low, or no interest loan that is affordable rather than have them take on debt that is unsustainable.
For the past eight months we’ve been working with the Ministry of Social Development, Good Shepherd and The Salvation Army on a pilot community finance initiative to provide low interest loans to people banks don’t normally lend to.
These are people who often live pay to pay, and are on low incomes. They do not qualify for the standard bank lending criteria, and because they’re living pay to pay they often don’t have any rainy day savings. This means that unexpected expenses can have a real impact on the basics in these peoples’ lives, like getting to work, and feeding and clothing the family.
The Community Finance partnership has just launched the second stage of the pilot – No Interest Loan Scheme (NILS). These no interest loans of up to $1000 for a maximum of 12 months are now available to people on low incomes through The Salvation Army’s centres in Manukau and Waitakere. Through this second offering we hope to better understand how the Community Finance initiative can work best – it’s a learning process for us and our partners!
Our hope is that the people we help become more financially confident and capable.
The families mentioned above were able to use Community Finance loans to help them out of tough situations.
The family with good credit but lacking confidence to speak to banks about loans were able to purchase a reliable vehicle. They were able to discuss their financial situation with a Salvation Army community worker in a comfortable environment and can now attend medical appointments and children’s activities. They’ve also been empowered by the money conversations and are likely to feel more confident talking to a mainstream bank in the future.
The family with bad credit were able to prove that they are addressing their debts and with a low interest loan were able to afford a small loan to help them with some car repairs (ensuring the constant medical visits were possible) without incurring high interest rates and fees.
Community Finance is not charity or a donation. It’s about helping people avoid paying unnecessary interest and educating them about how to avoid the debt trap. Loans are to help build assets that can provide economic opportunities and improve quality of life for people. Debt consolidation, rent and utility bills are not eligible.
For more information about the Community Finance initiative, click here, or to apply for a loan visit the Salvation Army's website.