Vehicle Finance – Lifting the bonnet on unethical practices

April 4th, 2022

Unmanageable debt is a significant contributor to hardship and poverty in Aotearoa. 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 situation arises because a vehicle in Aotearoa is necessary for daily living. In many areas, individuals find it difficult to get to work, shop for supplies and transport children without one. 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.

Vehicle finance loans can become overwhelming and expensive, as they are often the largest debt for vulnerable borrowers and a significant contributor to their unmanageable debt situation. This is largely due to compounding high-interest rates, high default interest rates, exorbitant fees, vehicle immobilisers, and poor value insurance add-ons – luring vulnerable borrowers into financial arrangements that will necessitate repayment of more than double the car sticker price.

As we will explore in our case studies, the pressure of debt means that vehicle repayments are commonly prioritised over essential living costs. For vulnerable New Zealanders, this significantly impedes their ability to provide for their household.

This report lifts the bonnet on how high-cost vehicle finance loans are impacting vulnerable people in Aotearoa. It examines how unconscionable lending practices and poor affordability assessments perpetuate financial hardship and poverty, highlighting the need for regulatory changes. To explore this, the report draws on CAP’s experience in assisting people in overwhelming financial hardship, alongside data from its frontline delivery teams.

The report is divided into four sections. First, we examine the impact of vehicle dependency on those in financial hardship. This section also examines issues with vehicle finance and the Credit Contracts and Consumer Finance Act (CCCFA), spotlighting key concerns. Second, we assess how vehicle finance perpetuates hardship and the attendant impact on vulnerable people. In the third section, the report provides the three case studies of Lia, Casey, and Rachel to demonstrate the real-life impact of predatory car loans. In the final section, key recommendations are made to the government, regulatory agencies, and creditors.

The report concludes by recommending the following:

• 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.