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Will increased debt help you deal with the cost of living?

By 19 November 2012 18

Andrew Barr has announced his plans to “expand the No Interest Loans Scheme (NILS) and help more Canberra households on low-incomes deal with cost of living pressures.”

The 2012-13 ACT Budget provided $740,000 over four years for the expansion of this scheme, which provides no-interest loans to people on low incomes.

We are hosting an information session on Thursday 22 November for community organisations who are interested in providing this valuable service.

The information session will include presentations by Good Shepherd Microfinance, which is responsible for running the NILS program nationally with capital funding provided by National Australia Bank. The Federal Government Department of Families, Housing, Community Services and Indigenous Affairs will also provide information on the support that it provides to the NILS Program.

Following the information session we will be seeking expressions of interest from interested community organisations.

One can only hope expanding the credit of people already struggling to manage their finances will not end in tears.

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18 Responses to Will increased debt help you deal with the cost of living?
#1
maxblues7:39 am, 20 Nov 12

“expressions of interest from interested community” in a no-interest scheme, interests me, strangely.

#2
clj9:31 am, 20 Nov 12

NILS is actually a much better option when, say, you need a fridge or washing machine, than payday lenders which are the other option for people on a low income. It’s for designated stuff (appliances mainly) and disbursed on a case by case basis taking into consideration income, other debts, capacity to pay it back. It helps with cost of living pressures in the sense that having a working fridge means you spend less on food -not like a line of credit or whatever.

#3
poetix9:37 am, 20 Nov 12

Love that headline.

Still, no interest loans seem better than credit cards.

#4
Chop7110:04 am, 20 Nov 12

Someone always pays.

#5
devils_advocate11:58 am, 20 Nov 12

clj said :

NILS is actually a much better option when, say, you need a fridge or washing machine, than payday lenders which are the other option for people on a low income. It’s for designated stuff (appliances mainly) and disbursed on a case by case basis taking into consideration income, other debts, capacity to pay it back. It helps with cost of living pressures in the sense that having a working fridge means you spend less on food -not like a line of credit or whatever.

I wonder how that gels with the whole ‘competitive neutrality’ deal to which the government used to pay lip service.

#6
clj2:12 pm, 20 Nov 12

devils_advocate said :

clj said :

NILS is actually a much better option when, say, you need a fridge or washing machine, than payday lenders which are the other option for people on a low income. It’s for designated stuff (appliances mainly) and disbursed on a case by case basis taking into consideration income, other debts, capacity to pay it back. It helps with cost of living pressures in the sense that having a working fridge means you spend less on food -not like a line of credit or whatever.

I wonder how that gels with the whole ‘competitive neutrality’ deal to which the government used to pay lip service.

What is the ‘competitive neutrality’ thing? NILS is only available to people who wouldn’t have access to ordinary sources of credit that most people can access when they need it, so it’s not actually undermining normal finance, if that helps. Centrelink already has an emergency advance payment system too.

#7
bikhet2:39 pm, 20 Nov 12

clj said :

NILS is actually a much better option when, say, you need a fridge or washing machine, than payday lenders which are the other option for people on a low income. It’s for designated stuff (appliances mainly) and disbursed on a case by case basis taking into consideration income, other debts, capacity to pay it back. It helps with cost of living pressures in the sense that having a working fridge means you spend less on food -not like a line of credit or whatever.

Agreed, so long as it’s a loan with a reasonable repayment period rather than being a hand-out in disguise. If it’s actually a hand-out then say so.

#8
breda3:07 pm, 20 Nov 12

It will mean that taxpayers will be out of pocket.

The reason some people can’t get conventional credit is that they are high risk. The so-called loan sharks cover that risk by charging very high interest rates, because they know that they will have a greater than average level of bad debts.

With this system, the bad debts will be covered by taxpayers. There will be bad debts, more than for conventional loans, and there is no other way of paying for them.

#9
dungfungus3:52 pm, 20 Nov 12

Why doesn’t Barr just dust off Rhodium Asset Solutions, re-capitalise it and re-name it Rhodium Battler’s Solutions?
The outcome will be the same namely massive debt write-offs and payment of outrageous fees to an outsourced consultant to wind the scheme up down the track.
All underwritten by the ACT ratepayers.

#10
astrojax3:57 pm, 20 Nov 12

breda said :

It will mean that taxpayers will be out of pocket.

The reason some people can’t get conventional credit is that they are high risk. The so-called loan sharks cover that risk by charging very high interest rates, because they know that they will have a greater than average level of bad debts.

With this system, the bad debts will be covered by taxpayers. There will be bad debts, more than for conventional loans, and there is no other way of paying for them.

you’re missing the point – first, taxpayers won’t pay more, there will be a redistribution of funding of programs and other program recipients, not taxpayers, will miss out. second, a ‘bad debt’ is someone who won’t pay the loan, usually both because they choose to mismanage their finances and because anyway the interest makes the repayments untenable. this scheme is for people who have such low levels of income through circumstances not aligned to simple mismanagement of income that they wouldn’t qualify for a loan from commercially-focussed lenders. there is no reason to assume there wil be any increase in bad debts – in fact, because there is no interest, there should likley be fewer bad debts…

#11
breda4:21 pm, 20 Nov 12

astrojax, it is you who are missing the point.

Are you saying that there will be no bad debts? Are you conceding that there will be some, but claiming that they will be no greater than commercial providers experience? Because if you are, then I have a bridge to sell you.

Commercial providers cover these from the profits they make from interest payments. In this scheme, they will be covered by taxpayers – and it is inevitable that the rate of bad debts will be higher than the Big 4 banks’.

It may well be that they are covered from within the program funding, or from other programs. But, it is still taxpayers money down the drain.

This is the kind of magical thinking that informs a lot of debate about public expenditure, sadly. Somehow, once it has been appropriated, it is no longer taxpayers’ money, but fairy dust, or unicorn poo, or something.

#12
clj4:59 pm, 20 Nov 12

In 2009 NILS had a national default rate of 3% (http://bit.ly/Xvefyd) compared with, for example, a national 30-day delinquency rate on home loans of 1.8% in May 2012 (http://bit.ly/QUQn4k). Sorry I can’t find closer time periods.

Bikhet, it’s definitely not a hand-out, I think in most cases it’s paid back through Centrepay. A bit like a Centrelink advance, but advances have to be paid back over 13 weeks – I think NILS terms are more flexible so that the repayments don’t take too much of the person’s income.

NAB has put millions into this scheme nationally so it’s not exactly just taxpayer dollars, if a major bank can see a reason to invest in it, what do you guys make of that? Plus microfinance is way cheaper and more sustainable than the equivalent emergency relief assistance would be, even if a few people don’t pay it back.

#13
breda6:17 pm, 20 Nov 12

clj, last year NAB put in $12.5 million in the form of a tax deductible donation to the Good Shepherd Foundation, which runs the scheme. Hardly an ‘investment’, just corporate PR with a tax deduction thrown in.

Quite simply, with overheads, inflation and bad debts, the scheme is a constant money drain, because it has no income source except corporate donors and government grants.

Given that NAB is prepared to kick in $12.5m this year, what is the point of ACT taxpayers getting involved at all? It is a fiction that it is a revolving money scheme – it’s a steadily depleting grant scheme. You can be sure that we will never see the money again. Taxpayers will be out of pocket for every penny – and no tax deduction for us.

The ACT Government never seems to be able to deliver basic services like a decent hospital emergency department because they claim not to be able to afford it. But when it comes to wasteful feel-good gestures like this one, ghastly public art and grants to its favoured community groups, they can always find a few million down the back of the sofa.

The press release is misleading. It gives the impression that lending people money helps them with the cost of living (it doesn’t change the cost of living at all); it implies that it is a revolving fund when in fact it is a slow draining sink; and it pretends that a couple of hundred thousand a year is significant when it is a drop in the bucket in the overall funding picture.

#14
clj10:14 pm, 20 Nov 12

I am not sure what the ACT govt funding is for since the bulk of the capital is from NAB. Possibly admin costs?i think it does involve minimal paid staff to approve loans though most people involved are volunteers. While it doesn’t directly address cost of living – looks like they wanted to fit some buzz words in there – it saves on the cost of food if you have a working fridge, your kids can go to school in their one set of uniforms if you can wash their clothes quickly, I think medical bills, perhaps dentures are eligible expenses too. Hard to get a job without teeth etc. Emergency relief funding comes from your taxes too via FaHCSIA and isn’t required to be paid back; if some of the pressure can be taken off that with this somewhat more sustainable program, isnt that worth doing? Hand up rather than hand out and all that.

#15
clj10:38 pm, 20 Nov 12

I should clarify – not that NILS can be used for emergency relief, but issues that NILS could help with are often a compounding factor in why people need help and it’s not uncommon for ER agencies to be asked for things that the person could buy themselves, if they had access to low cost credit. E.g. they’ve just been moved into housing out of supported accommodation and don’t have major appliances or whatever.

#16
devils_advocate8:35 am, 21 Nov 12

clj said :

What is the ‘competitive neutrality’ thing? NILS is only available to people who wouldn’t have access to ordinary sources of credit that most people can access when they need it, so it’s not actually undermining normal finance, if that helps. Centrelink already has an emergency advance payment system too.

Payday lending is only in demand by people who wouldn’t have access to ‘ordinary’ sources of credit. Not hard to see how NILS would be cutting the grass of the payday lenders. Which, until legislated otherwise, are still a perfectly legal business (I was going to use the word legitimate but that would have been a stretch).

#17
clj12:18 pm, 21 Nov 12

devils_advocate said :

Payday lending is only in demand by people who wouldn’t have access to ‘ordinary’ sources of credit. Not hard to see how NILS would be cutting the grass of the payday lenders. Which, until legislated otherwise, are still a perfectly legal business (I was going to use the word legitimate but that would have been a stretch).

Fair enough, that’s true, although Centrelink already does advances too. There are a couple of NILS providers in Canberra already, so this is an expansion rather than an introduction.

I have to say, when you hear stories of people’s ~$100 debts becoming $1200 debts (legally!) because they make a payment a few days late or whatever, it’s hard to feel sorry for payday lenders if nonprofits get in on part of their turf! But I take your point. I think the amount of paperwork, eligibility criteria and process involved with NILS means that payday lenders will still have a significant market though.

#18
devils_advocate2:23 pm, 21 Nov 12

clj said :

devils_advocate said :

Payday lending is only in demand by people who wouldn’t have access to ‘ordinary’ sources of credit. Not hard to see how NILS would be cutting the grass of the payday lenders. Which, until legislated otherwise, are still a perfectly legal business (I was going to use the word legitimate but that would have been a stretch).

Fair enough, that’s true, although Centrelink already does advances too. There are a couple of NILS providers in Canberra already, so this is an expansion rather than an introduction.

I have to say, when you hear stories of people’s ~$100 debts becoming $1200 debts (legally!) because they make a payment a few days late or whatever, it’s hard to feel sorry for payday lenders if nonprofits get in on part of their turf! But I take your point. I think the amount of paperwork, eligibility criteria and process involved with NILS means that payday lenders will still have a significant market though.

I don’t agree with centrelink being in the money-lending business either (competitive nuetrality or not). Public trustee dolling out payments one day at a time, fine. Hand out what people are entitled to, and that’s it. Pretty much anyone with a pulse can get a loan from a mainstream lender on commercial terms. If the banks won’t lend, there’s usually a very, very good reason for this.

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