The real cost of small loans

2012-11-03 09:13

The 2012 FinScope survey has interesting insights into what drives people’s borrowing behaviour, writes Maya Fisher-French

When one looks at the real cost of small loans, it is surprising anyone would ever consider going this route for buying non-essential items they could rather save towards.

Rob Powell of TNS Research Surveys, who undertook the latest FinScope survey, says their research found that consumers tend to focus more on monthly affordability than on looking at the total cost of the loan.

The 2012 FinScope survey, which interviewed 3 900 South Africans across the country about their financial behaviour, also found that trust, convenience and personal interaction are what drive people’s financial decisions rather than cost-effectiveness.

Powell uses the example of a person borrowing from a mashonisa (informal money lender) who would repay the mashonisa R500 a month over six months for a R1 000 loan.

The borrower would calculate whether they could afford those monthly repayments and make a decision to borrow the money based on that affordability rather than the total amount repaid which, in this case, would be R3 000.

This would suggest that a lack of understanding of total cost versus monthly affordability may be a contributing factor to our high levels of indebtedness.

During their field research, the team found that people who needed to borrow small amounts of money to meet day- to-day expenses or fund emergencies found it easier to go to the local mashonisa, where they did not have to fill in reams of paperwork or provide assets as collateral.

Mashonisas generally don’t ask too many questions and work on trust as they know the people in the community.

They take on higher levels of risk, but are more than amply rewarded for that risk by charging excessively for small loans.

The research also found that people are very embarrassed when talking about their debt, with 76% of respondents saying they do not like borrowing money and 43% saying they would be embarrassed to borrow.

Owing to the stigma around debt, people did not want to admit their levels of indebtedness to the researchers and 65% claimed they do not borrow.

Yet National Credit Regulator statistics show that 19 million South Africans are credit active, which accounts for more than 50% of the adult population.

The survey found that small businesses were a major driver of borrowing needs, with 29% of people stating that they would borrow money to buy or start a business.

Interestingly, most people preferred to use their credit cards or overdraft facilities to finance businesses rather than taking formal business loans.

Powell says this is driven partly by people buying stock for their businesses on their cards, but it also speaks to the fact that people do not want to have to undergo a formal business loan application in which they are required to provide a full business plan for what is often a subsistence type of business.

The red tape around business loans is clearly driving many small entrepreneurs to obtain financing through more expensive channels such as credit cards or mashonisas.

The survey highlights the need for both greater education around the costs of borrowing as well as finding ways to provide more cost-effective small loans, especially to entrepreneurs.


Join the conversation!

24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions.

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Comments have been closed for this article.

Inside News24

 
/World

Book flights

Compare, Book, Fly

Traffic Alerts
There are new stories on the homepage. Click here to see them.
 
English
Afrikaans
isiZulu

Hello 

Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.


Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.

Settings

Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.




Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.