The amount of interest loan sharks charge per day will be limited to 0.8 percent if the Government's Credit Contracts Legislation Amendment Bill passes.
Consumer Affairs Minister Kris Faafoi said following feedback on the legislation at select committee, the Government decided to introduce the cap to strengthen borrowers' protections.
"While this type of credit can be an immediate solution to financial problems, we know that high-cost, easy credit leads to worse problems in the long-run," Faafoi said on Tuesday.
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The Government had been urged to introduce a cap by multiple organisations, including FinCap, The Salvation Army, and The Council of Trade Unions, all of whom expressed concern about the Bill's strength.
The original legislation proposed new provisions to ensure that New Zealanders would never have to pay more than 100 percent of the amount they originally paid for a loan.
But the organisations concerned about the legislation said they wanted an overall interest rate cap to limit how quickly a loan can double in size.
FinCap chief executive Tim Barnett said in April the legislation was "full of loopholes" and that "strong expert consensus is that an interest rate cap is a bottom line to make this legislation work".
He said it was an opportunity for a "progressive Government" to include a cap that would "effectively get rid of the worst of these loan companies".
Faafoi said in May that the Government didn't set an interest cap rate because they didn't want to discourage loan sharks from operating.
"I want to strike a balance between tackling irresponsible lending while ensuring credit is still available to those who need and can afford it," he said at the time.
The legislation passed its first reading in May, and is expected to pass this year, and come into effect - in stages - starting in March 2020.
The Greens' spokesperson for Consumer Affairs, Gareth Hughes, welcomed the amendment to introduce the cap.
He said he wanted to "acknowledge the work of FinCap, The Salvation Army and other groups who have also pushed for interest rate caps".
How will the cap help?
If someone needs a loan to repair a car but can't get a credit card, the next option is to take out a small loan with a high-cost lender, known as a loan shark, who might charge 1.7 percent interest per day.
By setting a cap on the daily interest on the loan, the total interest payments would be reduced by about half, and that's the standard the Government wants to establish.
The Government is also proposing measures to regulate mobile traders, such as 'truck shops', who often sell goods on credit at inflated prices, particularly in low-income areas.
"We believe all mobile traders who sell goods on credit should be subject to the same levels of disclosure and responsible lending requirements - including affordability checks - before credit is given," Faafoi said.
He said the public is also calling for lenders to provide clients who fall behind on their loan repayments with information about financial support services.