South African consumers currently owe more than R1-trillion on home loans, cars and store and credit cards. Some struggle to keep up with their ongoing financial commitments and find themselves caught in a never ending debt trap. The old saying, “If you find yourself in a hole, the first thing you should do is stop digging,” is so applicable to debt. A small loan to solve a little financial hurdle may at times be justifiable, but it can lead to big financial trouble if not handled well.
TYPES OF LOANS
These days it’s so common to receive an SMS, call, letter or email from a financial institution offering you a loan. Independent financial planner, Paul Roelofse, says even though this may be enticing to someone who is desperate for cash and offers a quick fix, it is one of the most expensive costs of lending. “If you get offered a loan at a very low interest rate then there must be something more to it,” he warns. These are mostly termed unsecured loans.
Unsecured personal loans offer less risk for you, the borrower, because you do not run the risk of losing your home, car or other assets as you would with a secured loan. But the bank can still sue you to collect what is owed if you fail to repay the loan. That is why it’s important to always consider your ability to repay any form of credit very carefully before you apply. On the other hand, there are secured loans.
A secured loan is a type of loan where the lender requires you to put up some valuable asset as security, for example, your house or car. “The reality is that if you are borrowing to make ends meet, you are living beyond your means,” warns Paul. “You will be better off finding ways to live below your means. Drastic times call for drastic measures, even if it means scaling down on the house or car. Borrowing more money certainly won’t improve things.”
Many lenders have facilities for lending instant and unsecured loans to desperate consumers. People often loan money they need and it is collected on payday. The problem with this is that they end up borrowing again to make up for the shortfall. Their convenience and quick reply to a loan request have made them consumers’ favourites instead of the traditional banks. However, these lenders have been slammed for reckless lending.
According to the National Credit Act (NCA), financial institutions that lend consumers money should ask for proof of income to verify that the borrower can repay their loans. This is a result of some of these lenders advertising that only an ID book would do for one to qualify for a loan, which means there were no affordability assessments. After an investigation by the National Credit Regulator, the lenders have since started to sing a different tune about required documents for a loan and are complying with the law. Unfortunately those who had already taken loans without proper assessments must still make repayments.
Umashonisa or a loan shark is usually an informal lender in many South African townships. There are many stories told about their dangerous methods of getting their money back. The Soul City organisation frowns upon the illegal collection methods such as the retention of ID books, pin codes and bank cards.
BAD SPENDING HABITS
The organisation says that under the NCA, the maximum amount of interest, based on the current repo rate, that a credit provider or mashonisa can charge on an unsecured loan is 31 percent a year. For short-term credit agreements, the permitted interest rate is at five percent a month. This is for amounts less than R8 000 and a term not longer than six months.
This equals a rate of 60 percent a year. “South Africans have a history of unhealthy spending habits, with many living beyond their means, driven by the notion of ‘keeping up appearances’. The irony is that most of us are struggling with the rising costs of living, but we still want to maintain our status,” says Jan Moganwa, chief executive of Customer Solutions at Absa Retail and Business Banking.
Jan says one needs to be brutally honest about their financial health if they want to get out of debt. He encourages that once you find yourself digging a debt hole, you should quickly ask for help. This process will require a client to contact a debt counselling agent who will consolidate all the clients’ debt and make payment arrangements with the relevant financial institutions. “The Debt Review process aims to leave consumers with an improved credit score, a perfect credit report, and complete financial wellness,” he says.
USEFUL CONTACT DETAILS
¦ National Debt Mediation Association (NDMA).
¦ Responsible Credit Helpline on 086 111 6362 or SMS “Soul City” at 44238.
¦ The SMS is R1.50.
¦ Credit rehab: 0861 333 551 or 084 8588 284
¦ The National Credit Regulator: 011 554 2722