Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans.

Faafoi is on a mission to reduce the damage "predatory" lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.

The first, dubbed "Cap Option A" would be to limit the total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.

This option would only apply to high-cost lenders, and would aim prevent unmanageable debt and financial hardship from accumulating large debts from a small loan, the minister said.

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Limiting the measure to high-cost lenders like payday lenders and truck shops would not disturb mortgage lending.

A $400,000 loan at an interest rate of 6 per cent paid off over 30 years would result in around $440,000 interest paid, which would be above the Cap Option A's limit.

Just how massive loan costs can be is shown by an example of someone buying an iPhone 8 from a truck shop for 156 payments of $25.64 adding up to $4000, when the phone only cost $1249.

Cap Option B would limit the interest rate and fees (calculated together) to 200–300 per cent per annum, as well as limiting total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.

Cap Option C would set a low interest rate cap to prohibit high-cost lending. The interest rate and fees (calculated together) would be limited to 30–50 per cent per annum.

Faafoi said possible measures identified in the paper to protect consumers include caps on interest rates and fees, increased licensing or registration for lenders, strengthening enforcement and penalties for irresponsible lending and introducing more prescriptive requirements for affordability assessments and advertising.

Faafoi said law reforms in 2015 failed to protect vulnerable borrowers, which could be as many as 12 per cent of families.

"Clearly the 2015 amendments to the act did not go far enough and it is time now to finish the job and protect the most vulnerable consumers," he said.

"I've spoken with people who have been given loans that are clearly unaffordable for them, and others who have been lashed with huge penalties and fees. These practices trap people and whanau in an appalling debt spiral that is very difficult to get out of.

MBIE's discussion paper outlining the proposals said there were "unacceptable rates of non-compliance" with lending laws, particularly the responsible lending rules which are supposed to limit lenders to only lending to people who can afford repayments without falling into financial hardship.

Consumer groups, regulators, dispute resolution schemes and even some lenders have reported it is common for some lenders to perform only "superficial" testing of loan affordability and accept income and expense information provided by borrowers without checking it, even where it is plainly incomplete or incorrect.

And after a borrower is on board with a lender, further loans are often approved quickly, including by text without further checking of affordability, even months after the original loan was made.

There was aggressive advertising of high-cost loans to consumers who had previously repaid them, and

upselling of loans," the paper said, for example borrowers being encouraged to borrow $2000 when they had applied for $1000.

Under the proposals, the Commerce Commission could be given the power to unilaterally ban a lender from making any new loans, if it is satisfied that the lender is causing or is likely to cause harm with their lending.

There could also be a "fit and proper" character test for lenders, which could mean some people running loans companies would be ejected from the industry.

And fines for breaching lending laws could be lifted to $200,000 for an individual, and $600,000 for a company."

Faafoi is also planning a crackdown on exploitative debt collection tactics, banning harrassment, and debt collectors demanding unaffordable repayments from debtors.

"We have heard that it is common for debt collectors to make unaffordable repayment demands. In one example, a borrower offered the maximum of what they could afford to pay (approximately $120 per month in repayments); the debt collector refused and demanded that double that be paid.

Some debt collectors were also charging excessive charges. In some cases, total collection costs are bigger than the initial loan. Examples of individual fees include a $30 letter fee incurred when the debt is initially passed on to the debt collector and $15 being charged per phone call.

Lyn McMorran from the Financial Service Federation (FSF) of second-tier lenders, including Instant Finance, welcomed the consultation paper, but was concerned the proposals could make it harder, and more costly, for mainstream lenders, and drive exploitative lending underground.

She would have preferred to see greater enforcement of the current lending laws, which the Commerce Commission had used to put many truck shops out of business.

But, she welcomed the "conversation" on interest rate caps on things like payday loans. "800 per cent per annum in anyone's language is outrageous."

Robert Choy, from ethical lender Nga Tangata Microfinance, welcomed the proposed crackdown on exploitative lending.

One of the potential benefits of the interest rate caps was that it would be harder for short-term loans to morph into a decade of debt.

"People may have borrowers $2000 for a car, and paid $10,000 over four years," he said.