Here’s what the new lending rules mean for you

Overall, borrowing is getting safer here in New Zealand. Thanks to recent rule changes, the chance of you getting into crippling debt will be lower.

On the flipside, you’ll need to provide a few more things when you apply for a loan or to increase your credit limit. You may not be able to borrow in the same way you’ve been used to.

Essentially, before they can lend, banks and other lenders are now required by law to assess whether you can afford to top-up your credit or borrow. Applications may take longer, so try not to leave it to the last minute!

What’s changing about getting loans and credit

From 1 December, lenders will have to make extra sure:

• You can afford the repayments, now and in the future. They’ll need to work out whether your income exceeds your expenses.
• The loan or credit suits what you’re aiming to achieve with it. Is it the right solution for your situation?
• Anyone guaranteeing your loan is able to repay. This includes if you are a guarantor for someone else’s loan, too.
• Any add-ons fit your needs, and you’re okay with how much they cost. These include insurance and warranties that typically get wrapped into the amount being borrowed.

To figure out if you can afford a loan or credit, and whether it suits you, lenders will be gathering more information about your circumstances, income and expenses than before. They’ll ask questions and verify the information you provide.

Save time when borrowing with this checklist 

It will help to come prepared with documents that show your: 

• Regular income, like payslips or bank statements
• Current expenses
• Other debt repayments

You’ll also need to take along:

• Bank statements from your usual transactional account for the previous 3 months  
• Other relevant documents – for example your employment contract if your work is part time or temporary, or if you’re still in a trial period
• Proof of income from other sources, like a boarder, including how long it might last.

It will help to know where you’re at with your money

Sorted has got the tools so you can work out your financial situation and make the application process as quick and smooth as possible.

• Debt calculator – handy when you are deciding how much of a loan to apply for, or to help you decide on a limit. Lenders have their own calculators, but on Sorted you can play around with loan amounts, interest rates, terms or repayments to find the best fit for you.
• Budgeting tool – to help you figure out how borrowing money will work with all your other incomings and outgoings. Lenders will be looking for a surplus that includes the new loan repayment. You can print out your budget and put it in with your application.

Navigating the new lending landscape

One of the team here at Sorted recently had to redo her home loan application because of the new lending rules. She definitely noticed some differences in the process.

“The income section asks for a few more details,” she said, and there was “a new question where it specifically asks if your income is likely to decrease in the next 12 months.”

She noticed changes in the way expenses were broken down and detailed, such as different types of insurances and rates. And of course, the debt section specifically called out popular Buy Now, Pay Later schemes like Afterpay, Laybuy and Zip.

And in terms of her family’s expenses, the application even asked which ones they’d be unwilling to give up.

These changes are the latest efforts to keep borrowers safe

Over the last 18 months, changes to lending laws have made borrowing fairer, protecting people from excessive interest and fees. 

In 2020, limits were set on how much lenders can charge in interest and fees on payday loans, where the annual interest rate is 50% or even higher. Thanks to these limits: 

• Your cost of credit is now capped – meaning you will never pay back more in interest and fees than 100% of the amount borrowed.
• Compound interest is banned on high-cost loans. 
• Default fees must be $30 or substantiated (they must show why the charge is more).
• There’s an 0.8% per day cap on interest and fees. 

Also thanks to these changes, mobile traders also now have to follow the same rules as lenders. 

4 tips to remember when applying to borrow money

• Be prepared – with information about your income, expenses and debts, including 3 months of bank statements from your usual account.
• Be clear – about your reason for the loan, the amount you need and for how long.
• Be patient – when lenders need to gather specific information (this may mean a lot of questions).
• Allow time – to have discussions and work through the process with your lender.

Where to get help

Now if you find you are unable to get a loan because of these changes, you will have other options. Here’s where to start exploring these, especially when money gets tight.