Adams Paul: Credit Contracts and Consumer Finance Bill — In Committee 
Adams Paul: Credit Contracts and Consumer Finance Bill — In Committee 
[Volume:611;Page:8699] 
PAUL ADAMS (United Future) 
: 
 It is my pleasure to rise on behalf of United Future which will be supporting this bill. I personally believe that it is a very important bill as it affects the vast majority of New Zealanders. We can ask people about the many powers that work in their life but most people will never mention the power of interest. They will often mention the power of love they may mention the power of a dream or many other powers but they will very seldom mention the power of interest. 
This bill is about the consumer. It is called the Credit Contracts and Consumer Finance Bill. I agree with the previous speaker that compliance cost is an issue but with this legislation we are really trying to bring to people’s attention the issue of interest costs—so that they really do know exactly what they are getting into. We are trying to show them the full cost of borrowing. I believe that if we are honest the majority of members often do not understand the true costs of borrowing. 
Let me give an example because I think this legislation is good and very important. But on the other side of this coin I also think we have a responsibility to educate people and to show them what they are really getting into. Let us have a look at credit card debt. Let us say that a person has a credit card balance of $3900. People may say that that is not a problem and I believe that our current national average balance is normally far higher than that. Apparently our national average credit card debt today is around $4500 to $5000 but I have done my calculations to be conservative on the amount of $3900. The person will make just the minimum monthly repayments until the balance is paid off. Those minimum monthly repayments will be at the rate of 2 percent of the unpaid balance. How long do members think it will take to pay off that amount at an average interest rate of 18 percent? Most interest rates on our major cards are still around the 18.75 percent mark. Well it would take 37 years and 7 months to pay it off—if that person were still alive. He or she would have paid a total of $10931 of which $7931 would be interest and $3000 principal. If that person were educated to pay even at the rate of 4 percent of the minimum balance the time factor for paying off that card would be reduced to 10 years and he or she would save $6200 in interest. 
Interest is an incredible cost to people. If we could just encourage them as many have spoken of to start saving—and I realise that this is not to do with the bill—and if they managed to put that same $3000 into a bank account at 10 percent interest without adding anything else to it at the end of the same period of time they would have $126454. People need to understand the cost of interest in their consumer contracts when they enter into them. Most people never ponder the power of interest. 
Another trap and I do not know whether we can cover it adequately in legislation is that many people will top up their home mortgage as the next-best thing to free money. A person who has a $150000 mortgage at an interest rate of 11.5 percent can go to a bank and say that he or she wants to borrow $10000 to buy a boat. The bank will say: “No problem at all. You don’t even have to increase your repayments. We will just extend the length of your mortgage by 9 months.” People often think that that is the nearest thing to free money they will ever get but what actually happens? 
Deborah Coddington 
: Do banks do that? 
PAUL ADAMS 
: Most banks will do that. Let us have a look. The mortgage repayments would be about $1600 per month so someone who borrowed an extra $10000 would have already paid $51895 in interest at the end of the third year and only $2674 in principal. When the bank gives the person the $10000 sum the mortgage repayments remain the same. Before the mortgage is altered the total interest to be paid over the whole contract would be $234064 but because the person has now topped up the mortgage the interest paid over the 20 years and 9 months will be $314948. I hope that the person who buys a boat with an extra $10000 catches a lot of fish because the extra borrowing is going to cost $90884! 
We really need the legislation we are dealing with now to try to show people the true cost of interest. We have educated them to be borrowers instead of savers and I think many would agree that that is a mistake. United Future believes that this legislation goes a long way to showing people the pitfalls and traps in borrowing.