The New Zealand government Monday unveiled a proposed new law that would make it illegal for banks and other finance lenders to give loans that result in "substantial hardship" for borrowers.

Consumer Affairs Minister Chris Tremain said the Credit Contracts and Consumer Finance Amendment Bill would better protect consumers from irresponsible lenders.

"The government is getting tough on loan sharks and lenders who don't play fair. Money lenders should not be able to prey on desperate people, leaving them and their families trapped in a spiral of debt," said Tremain in a statement.

"These will be the biggest changes to consumer credit law in a decade. It is time for a significant shift in lending laws to increase protection for borrowers and target irresponsible lenders. "

Other changes in the legislation included a requirement for more timely and complete disclosure of loan terms, and extending the "cooling off" period for borrowers to cancel their loans, and new controls against misleading, deceptive or confusing advertising.

Lenders would face being banned from the industry for non- compliance, under the proposed law.

"With such significant changes, it is important that we get it right. I'm looking forward to touring the country and getting feedback from the community services that deal with people who have been targeted by loan sharks," said Tremain.

"I am also looking forward to meeting with members of the lending industry. I know many lenders are calling for changes like these to help rid the industry of those who give it a bad name."

The legislation was necessary because too many unscrupulous lenders were preying on desperate people, trapping them in debt which left them worse off, he said

The proposals followed the Financial Summit in August last year when 250 people from community groups, budgeting services, NGOs, banks, financial regulators, and credit providers gathered to discuss ways to tackle irresponsible lending.

The Bill would target lenders who gave loans that borrowers would clearly struggle to pay back; those who misled customers who failed to understand the real cost of a loan; those who failed to disclose essential information or who took disproportionate security.

Once submissions on the Bill had been considered, the legislation would be finalized and introduced to the Parliament, and the government hoped to pass it by mid-2013, he said.

The initiatives in the draft legislation were expected to create downward pressure on interest rates, he said.