Financial mentoring experts have described the Government's upcoming changes to the lending code as a "recipe for disaster", with the worry that more Kiwis will borrow money they are unable to pay back.
Eleven pages of the old lending code updated by the previous government will be revoked when the new version comes into effect on July 31.
One of the changes to the code is the obligation of lenders to check loan applicants' expenses.
The old code advised that lenders should take reasonable steps to specifically "verify" information from borrowers, but the new code replaces that word — instead trusting lenders to "obtain reliable information".
The Government insists it would still protect people resorting to loan sharks by allowing banks and other lenders to have more flexibility to approve loan applications instead.
"I'm very worried and have been for quite some time that people who want to go and get small amounts of money and don't have thousands sitting in their bank account have had to go through these really rigorous tests," said Commerce and Consumer Affairs Minister Andrew Bayly.
"Those people we really want to protect are having to go to loan sharks or other people that we really don't want them going to."
He said "overly arduous" checks increased how long it took to process a loan, making it "no longer affordable" for providers to offer small loans.
"They were effectively frozen out of the market and many vulnerable Kiwis were instead forced to borrow from high-interest loan sharks."
FinCap adviser Jake Lilley said these changes being implemented at this time could be a "recipe for disaster".
"You've got three things going on. Firstly, you're seeing financial mentoring services losing their funding. MBIE's research is saying that around half of people are having to go without essentials to meet loan repayments.
"And then you're also seeing this change to the code which weakens the protections for someone against being stuck in an unaffordable loan."
The Consumer Credit Research report by the Ministry of Business, Innovation and Employment (MBIE) estimates a quarter of New Zealand adults with credit defaulted on loans last year.
It also estimated 53% of adult New Zealanders applied for credit last year and that almost all (94%) of them were approved.
Lilley said that while banks might have better processes around helping people when they get into trouble, it can still be risky if the budget does not balance.
He recommended other sources of help for New Zealanders in financial hardship.
"A lot of entitlements you can access through Work and Income and often people aren't aware. Reach out to a financial mentor. There are also social loan schemes. So those are no cost."
Christians Against Poverty has won back more than $1.2m for clients disputing loans since 2021.
The charity has raised 167 disputes with clients and won 125, returning an average amount of $9836 for clients.
Chief executive Sam Garaway said he was "disappointed" to see some protections for vulnerable customers rolled back.
"Every month we're receiving hundreds of calls from people and unfortunately at times we're having to turn them away because we're overbooked or we don't yet have service coverage in their area, so we know that this is the tip of the iceberg around the issue of irresponsible lending."
One client helped by Christians Against Poverty was South Auckland mother Winnie McClutchie.
She used a loan shark to purchase a car worth $7400 — which turned into $16,000 when interest, fees and penalties were added.
"I just couldn't afford to make the repayments they just seemed to get higher and higher. I was stressed all the time," she said.
Two of her children had to live elsewhere so she could reduce household costs for a while.
When she won the dispute, she was reimbursed about $9000 and her debt was wiped.
"It was the best feeling of my life," she said.
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