The truth behind beneficiary loans

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Are you considering a beneficiary loan but concerned about interest rates? Perhaps you weren’t aware that benefit funding is considered a very secure income stream – you don’t need to be in employment. The facts are often very different from the fiction when looking at the availability and cost of beneficiary loans. Let us walk you through the process and answer the questions many people are afraid to ask.

There has been significant growth in the beneficiary loans market in New Zealand in recent years. This is a sector positioned between traditional bank loans and high-interest lenders. There seems to be a general misconception that loans for beneficiary recipients somehow carry a greater risk than conventional loans for those in employment. We will now look at the truth behind beneficiary loans and their relative security, especially during the COVID pandemic.

Alternate Finance beneficiary loans

Here at Alternate Finance, we offer a beneficiary loan structured around your particular income and lifestyle. While many high-interest lenders will provide unsecured finance, we prefer to take a responsible approach, requiring security and undertaking credit checks. The more security available, the more competitive the interest rate, which ensures that finance is affordable for our clients.

Security of income/New Zealand benefit system

The Work and Income benefit system in New Zealand (commonly referred to as WINZ) provides financial assistance for those with limited income. While traditional banks prefer employment-based income streams, is there anything more secure than benefit payments from the government?

The key to any financial arrangement is the risk/reward ratio which is simply the risk that the customer may default and the interest rate charged. So, it stands to reason that with a secure income stream provided by the New Zealand government, this added security creates an environment for competitive interest rates. There is still a need to undertake credit checks, and here at Alternate Finance, we also require security.

Why might you need a beneficiary loan?

Most beneficiary loans are agreed in less than eight minutes. As a consequence, they are extremely useful in an array of different scenarios. For example, many of our clients will use a beneficiary loan for:-

  • Vehicle repairs
  • Property bonds
  • New furniture
  • Replacing old electrical equipment

If you require funds at short notice, please feel free to visit our website or phone us directly.

How do you apply for beneficiary loans?

While we appreciate that many people are comfortable with online applications, we also provide a telephone service. Signing up for your first beneficiary loan NZ can be daunting, challenging and many people fear signing on that dotted line. This is due to a mixture of apprehension and, in some cases, a misunderstanding of the system.

It is important to remember that loan defaults help neither us as a company or you as a client. They will impact our cash flow, it will affect your credit rating, and there are no winners. So, while our application process usually takes less than eight minutes to complete, we still carry out traditional affordability checks.

How secure is your income stream?

When applying for a beneficiary loan, we will consider your level of benefits received and any additional income. As we touched on above, there is a general misconception that loans based on benefit payments are somehow “risky”. In reality, the WINZ benefit system is a safety net that provides a minimum income level for those living in New Zealand. These payments are guaranteed by the New Zealand government and, therefore, extremely secure.

It is sometimes helpful to take a step back and look at the situation from a distance; what is the downside? If you were able to secure employment or increase relatively low employment income, you might not qualify for future benefits. However, as your repayment schedule for the beneficiary loan was based upon your benefit income, any additional income from employment would strengthen your financial situation. 

If we take a worst-case scenario, let’s say your new employment position did not work out. As your income would fall, you would likely qualify for benefit payments. There is a financial safety net there to help.

Interest rates for beneficiary loans

While the finance we can provide will depend upon your specific circumstances, the minimum loan is $800 repaid over 36 months, unless arranged otherwise. We currently offer annual interest rates of between 13.95% and 26.98% per annum, based on your circumstances. 

Loan repayments

When we assess beneficiary loan applications, there is a tendency for customers to opt for the shortest loan duration and relatively high monthly repayments. In reality, you must maintain a degree of headroom for unexpected expenses. If all of your income, after living expenses, is allocated to loan repayments, how would you cope with unforeseen costs such as:-

  • Car maintenance expenses
  • Replacement of electrical goods
  • Home repairs

While these additional costs may be relatively small, they may place pressure on your ability to maintain your loan repayments. If you default on loan repayments, there will be additional interest charges, and it could affect your credit rating. As a consequence, it is essential to leave a degree of headroom for these unexpected costs.

As a benchmark, our customers typically make loan repayments of between $25 and $50 a week, depending upon their circumstances and the size of the loan.

Loan duration

Here at Alternate Finance, we will advise you of the most appropriate loan duration for your situation. While we appreciate that any extension of your preferred loan period will attract additional interest charges, again, there needs to be a degree of headroom. The level of loan repayment and loan duration are significant factors.

The benefit of security

As we mentioned earlier, Alternate Finance is positioned between traditional banks and unsecured high-interest lenders. To provide more affordable interest rates and repayment terms, we require security against all loans. This can include collateral such as:-

  • An asset – vehicle, etc
  • Property
  • A future financial windfall

There is also the opportunity to involve a guarantor with your loan. This is a third party that would guarantee repayment of your loan in the event of default.

Increasing your loan

Many of our customers return time and again to take out new beneficiary loans. However, you may find yourself in a scenario where you would prefer to “top up” an existing loan. Assuming that you are up-to-date with your repayments, have a good credit history and have proved reliable in the past, there is no reason why this can’t be arranged.

When increasing an existing loan or providing a new loan, we must carry out further credit checks and affordability calculations. If your situation has changed, perhaps your finances have taken a turn for the worse; this may impact your ability to secure additional finance. If there are options and alternatives, we will discuss these with you; suffice to say, we will only discuss affordable options.

Payment difficulties

On occasion, some of our customers will experience unexpected financial difficulties, which may impact their ability to cover repayments in the short term. It would help if you made us aware of any changes in your situation as soon as possible. This leaves open many options, such as a potential repayment holiday or extended loan duration with reduced payments. The sooner you tell us that your situation has changed, the sooner we can discuss the alternatives and take action.

Unfortunately, some of our customers fail to advise us of changes in their finances. This can result in default, the calling of security and additional interest/charges. In many cases, these additional charges can be avoided and refinancing considered. Please don’t leave it until your finances have reached a point of no return!

Regulatory protection

Lenders in New Zealand have both moral and legal obligations when it comes to providing loan finance. These are set out in the Credit Contracts and Consumer Finance Act (CCCFA) and offer a degree of protection for consumers. As lenders, we are obliged to:-

  • Comply with disclosure obligations
  • Ensure that any loan meets your needs
  • Fully explain our terms and conditions
  • Make sure that each loan agreed is affordable
  • Abide by interest/fee limits
  • Treat customers fairly in the event of financial troubles

In order to provide beneficiary finance in New Zealand, companies need to be registered with the Financial Services Providers Register. There are also independent resolution schemes available in the event of any dispute.

Working together

Here at Alternate Finance, we have our systems in place, credit checks and security requirements. While many customers prefer to use the online application form, we also have telephone services available if you have questions or wish to discuss your situation in more detail. 

Your specific scenario will dictate interest rates, loan duration and the terms and conditions. The idea that loans for benefit recipients are a nonstarter is wrong. In many cases, benefit payments guaranteed by the New Zealand government can be more secure than employment income. Indeed, during the recent COVID pandemic, it could be argued that New Zealand government-backed benefit payments offered a more robust degree of security?

Conclusion

Operating in an important gap between traditional banks and unsecured high-interest lenders, here at Alternate Finance, we provide an essential service to our customers. Credit checks and a requirement to provide security against finance protect our customers and us. The beneficiary loans market has increased dramatically in recent years, assisting many people in need of short-term capital.

If you are on benefits and require a loan, we would welcome the opportunity to discuss your situation in more detail and the services we can provide. Finance agreements are shaped around each client’s specific scenario and requirements, ensuring maximum financial assistance within an affordable structure.

Mark Benson

Mark previously enjoyed 15 years as a stockbroker/financial adviser and still maintains a strong interest in all things financial. Over the years, he has written about subjects such as property finance, loans, pensions, insurance, stock market investments, tax planning and more. Mark believes it is essential to keep up with the latest financial regulations and adapt your finances accordingly, something he portrays in his financial articles.