The government is bringing in tougher measures to clamp down on loan sharks and truck shops.

Photo: RNZ/ Sarah Robson

Prime Minister Jacinda Ardern has announced there will be an interest cap on high cost loans, to stop people spiralling into debt.

Ms Ardern made the announcement today after a review of the Credit, Contracts and Consumer Finance Act, including the changes made in 2015.

Interest and fees on such loans will be limited to 100 percent of the amount borrowed.

That means if someone borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest.

As well as the interest rate cap, the measures include a 'fit and proper person' test for mobile traders and the heads of companies ovvering consumer credit contracts. There will be tougher penalties for irresponsible lending and clearer responsible lending requirements.

"These new measures will halt the very worst of those preying on vulnerable and desperate people while enabling borrowing that meets their needs in an affordable way," Ms Ardern said.

Commerce Minister Kris Faafoi in a statement said the 2015 amendments to the Credit, Contracts and Consumer Finance Act did not go far enough in protecting New Zealand's most vulnerable consumers from loan sharks.

"The introduction of an interest and fees cap on high-cost loans will prevent people from accumulating large debt from a single small loan," he said.

"The changes also lift the level of professionalism across the industry, by requiring directors and chief executives of lenders offering consumer credit contracts to pass a 'fit and proper person' test in order to register as a Financial Service Provider."

Photo: RNZ / Sarah Robson

Mr Faafoi said any lenders breaching the responsible lender principles would face stiff new penalties of fines up to $600,000 under the strengthened enforcement provisions in the law.

The government is tackling predatory behaviour by truck shops and others who sell door-to-door on credit or other deferred payment, by requiring all mobile traders to pass the 'fit and proper person' test.

The law will be strengthened to give consumers clearer powers when asking uninvited salespeople to leave their premises, including by strengthening the legal status of 'do not knock' stickers, Mr Faafoi said.

The new measures will come into effect from 2020, subject to Parliamentary timeframes.

Earlier this year, the government said it wanted to strengthen enforcement and penalties for irresponsible lending and bring in more prescriptive requirements for affordability assessments and advertising.

However, budget advisors said an interest rate cap alone would not be enough to stop people from ending up trapped in a cycle of debt.