Lifting the bonnet on unethical practices
The ability to access a vehicle is often necessary for daily living and working in Aotearoa….
In many areas, people can find it difficult to get to work, shop for supplies and transport tāmariki without a car. Those who cannot pay for a good, reliable car with cash may need to take out a loan with a finance company to buy one.
Unfortunately, vehicle finance practices in New Zealand have a dark side — particularly when it comes to vulnerable buyers.
“It is hard for a single parent with more than two children to get a car. You will get declined straight away if you do not have good credit.” — Rachel
Rachel’s identity changed to a model to protect privacy. Source iStock.com – njgphoto
Vulnerable buyers can be lured into financial arrangements that require repayment of more than double the car sticker price. This can stem from a combination of:
- Compounding high-interest rates, high default interest rates, exorbitant fees
- Unethical use of vehicle immobilisers
- Poor value insurance add-ons
- Poor affordability assessments
“It is very misleading: when you enter the showroom, they have the price tags on the cars, and the car says $4,000. And you think, “Oh, okay. This car is $4,000.” However, when you sit there in the accountant’s office and buy the car, you find that it is not only $4,000, it is $10,000.” — Patricia, CAP client and single parent, wider Tāmaki Makaurau
For more than one in two families who come to CAP for Debt Help, a car loan makes up their most sizeable debt – absorbing a substantial percentage of their weekly income.
This prevalence makes unethical vehicle finance a significant issue for people in financial hardship.
Lia’s excitement of driving a newly purchased car faded as her family juggled high car repayments with their existing debts and bills on a single income. They started to skip meals; falling behind on bills & getting into further debt.
Lia’s identity changed to model to protect privacy. Source TS Image photonewzealand
Vulnerable buyers with high cost vehicle loans can easily become overwhelmed. The pressure of debt means that vehicle repayments are commonly prioritised over essential living costs, which can lead to further harm.
A CAP Debt Coach in West Tāmaki Makaurau observes:
“A car loan carries the largest emotional and stress factor. Having a car can feel
essential, and the threat of losing it is extremely stressful, especially if they are working and need the car to get to work. I have had shift workers for whom public transport is not an option; if they lost their car, they would lose their job. A car will take priority over any other debts, sometimes even rent.”
Vulnerable buyers with low credit scores — unable to access more affordable vehicle finances — are often compelled to buy a vehicle immobiliser (vehicle disabling device) with their vehicle.
While immobilisers have been marketed to help deter car crime and theft, CAP has found that they are primarily used as a punitive measure for missed debt repayments and create a power imbalance between the lender and borrower.
This goes against the grain of the Credit Contracts and Consumer Finance Act, which states that “Neither a creditor nor a creditor’s agent may activate a disabling device unless — the creditor or the creditor’s agent has given the debtor reasonable notice, in advance of the activation: (i) that the disabling device is to be activated; and (ii) about what action the debtor may take to prevent the disabling device being activated.”
(View CCCFA legislation)
“I had a client, she lived in constant fear of her car being immobilised when she had the kids in it. She worried that she could not get them home.” — CAP Debt Coach, West Tāmaki Makaurau
CAP clients speak of immobilisers being activated without warning and under illegal circumstances. One CAP client recalled walking for hours to work, unable to use her car.
Another found their car disabled after finishing a night shift.
A Debt Coach in Whangārei shares a story of a client who had her vehicle immobilised in a rural area as she was travelling up north:
“She was stuck in a place where there is no mobile connection. She was in the car in the middle of the night with a baby and two toddlers… this was in the winter as well, so they were freezing. She ended up just waiting for a car to go past so she could flag them down. But in the middle of nowhere… there were no cars that went past. So, she just bundled her kids up and started walking until she could get some phone coverage, so she could ring somebody to come and pick her up.” — CAP Debt Coach, Whangārei
CAP’s full report on vehicle finance explores these and other unconscionable lending practices — including poor affordability assessments — that are perpetuating financial hardship and poverty in New Zealand.
CAP draws on experience in assisting people in overwhelming financial hardship — using data from its frontline delivery team, alongside three CAP client case studies, those of Rachel, Lia, and Casey.
“None of those insurances covered issues that were mechanical. If your car hits the hay every couple of months and it is mechanical, it will not [be covered by insurance company].” — Casey
Casey’s identity changed to model to protect privacy. Source iStock.com – nazar_ab
CAP’s Vehicle Finance Report makes the following recommendations:
• Establish an inquiry into the vehicle finance sector
• Provide explicit guidance on appropriate establishment fees
• Prohibit the practices of earning commissions from flex interest and insurance products
• Review vehicle finance with total cost of credit cap
• Introduce a deferred sales model for add-on insurance products
• Ban immobiliser activation as a method of leveraging loan repayment
• Increase enforcement action to curb unethical vehicle finance practices
• Scrap referral fees and cost recovery fees.