Amanda Morrall looks at the principles of responsible lending and finds out how to shark proof your borrowing plan with high interest lenders

By Amanda Morrall

What separates a loan shark from other lenders who charge high interest? And more importantly, how can you avoid getting bitten?

It's a matter of principles, four of them actually.

So called responsible lenders observe the following guidelines. (See the Financial Services Federation's responsible lending guidelines here).

1) Ensuring that the lender understands the circumstances of the borrower.

2) Determining whether the loan is right for the borrower; that is whether they can repay it in the specified time and aren't being set up to fail.

3) Making sure the terms and conditions are understood.

4) Helping out when things go wrong. 

Kirk Hope, former head of the Financial Services Federation and now chief executive of the Bankers' Association, says this fourth principle (helping out) should be consistent with the second principle; that is a responsible lender is obliged to reject the loan up front if it looks like it's destined to go wrong.

In defence of lenders, Hope said it needs to be recognised by those critical of finance companies that the circumstances of borrowers (particularly those using credit facilities) can change from the time of the loan.

"In many cases, where loans go into default, the lender has provided the money in good faith, but the borrower's circumstances have changed and impacted their ability to repay the loan.''

For those who find themselves in the unenviable situation of having to borrow, Hope offers the following tips:

First and foremost: if you can avoid it, don't get into debt in the first place.

And make sure that the lender discloses all the charges in relation to the loans.

Questions to ask:

How much interest will I have to pay?

Sometimes lenders only tell you the weekly repayment amounts, always make sure you know what the loan is going to cost you overall. ie. if you get a loan for $2,000 at 20% per annum this equates to $23 per week and $430 worth of interest.

You should think about how much interest you are comfortable paying before getting the loan.

Sites to calculate interest include of course interest.co.nz  and sorted.org.nz .

Before you enter into the loan make sure that the lender has told you about all the fees and penalties which may apply.

Questions to ask:

How much is the loan application fee?

Is this added to my loan, and am I paying interest on it?

Are there any penalty fees payable on my loan if I miss a payment, and how much will that be?

Will you charge penalty interest and what is the rate of penalty interest that will apply?

If you charge penalty interest, will it be charged against my whole loan? 

Will I be charged other fees?

Other top tips:

• Make sure you shop around for the best rate, treat credit like you would a car, or a TV and make sure you get the best value for your money (see interest.co.nz's comprehensive comparative interest rates section for borrowing here).
• If you get an interest free deal for a certain term make sure you pay the loan off within that term.
• Make sure that you properly set up automatic payments or other payment means to clear your debt quickly so the payments are made on time and you don't incur unnecessary charges.
• It is important as a borrower to remember that if your circumstances change and you can no longer repay the loan the first thing you should do is contact your lender as soon as possible to review your options.