An individual’s credit score is the number one issue regulated lenders refer to when deciding whether or not to approve a loan application.
Whenever a formal application for a loan is filed, under South African finance laws, the lender is legally obliged to request that person’s credit file.
Successfully applying for a loan and then paying it back on time can improve a credit score (although this isn’t something that’s recommended by lenders as a strategy to improve your score). The opposite is also true and much more dangerous – failing to meet regular monthly payments, ie to ‘honour the agreement’ you made, negatively impacts on your credit score, ensuring a ‘default’ is flagged up.
This makes it more difficult to get a loan next time round as the next potential lender will consider you a ‘high risk’ when it comes to repaying the loan. Not only that, but failure to pay the agreed monthly sum means penalty rates will be applied to your existing loan, making it take even longer to pay off fully.
So, what can South African citizens who are unemployed, living in poverty and/or not financially literate, do to improve their access to credit? Unfortunately, many turn to unregulated lenders (or ‘loan sharks’). After ‘an agreement’ is signed, unregulated lenders often increase interest rates to extortionate levels and use threats of violence to manipulate their victims.
Many say new lender regulations don’t go far enough
In an effort to combat these practices, the South African National Credit Act introduced new legislation that curbed ‘reckless lending’ by threats of court proceedings and hefty fines. A ban on automatic credit increases has also been applied, along with caps on interest rates and fees.
Due to the fact not all South Africans speak the same language, any loan agreement has to be translated into two languages so that the terms are clear to the individual applying for the loan.
For those who are struggling with repayments, they are entitled to seek financial advice or help from a Debt Counsellor
Of course, the regulations only apply to those lenders who are officially registered in South Africa. Loan sharks (known as a Mashonisa in South Africa) avoid notoriety and often use violence in a bid to get paid. This then becomes a police matter. It is believed there are still around 40,000 loan sharks operating in the country at present.
Van Aswegen, director of wonga.co.za remarks that denying high risk consumers access to short-term loans may protect them in one sense ie they can’t run up large debts they won’t be able to repay in the future. But it doesn’t address the problem of their financial need. It’s certainly not a solution. As the saying goes, if one door closes, then another one opens and unfortunately, that’s often the desperate consumer knocking on a mashonisa’s front door. The consumer’s risk is then even greater.
Industry professionals making debt worse for consumers
But it’s not only the mashonisa’s that increase interest rates. Even regulated lenders can end up costing consumers thousands of Rands more. They do this by ‘upselling’ an unsecured personal loan’s repayment terms ie encouraging the individual to take out credit for a longer term than they originally applied for.
At first this can look attractive, since the monthly repayments will be lower due to the longer the length of the loan. But when added up over the total term, consumers end up paying far more than they would have before the ‘upsell’, especially when interest rate hikes are added. It’s the kind of situation the country’s National Credit Regulator refers to as a ‘long-term debt trap.’
In fact, the Regulator’s figures for 2022 show that 32 per cent of unsecured loans have repayment terms of more than five years. For the last three months of the same year, more than one fifth of those loans were ‘non-performing’ ie more than 90 days in arrears. Any further increase in the cost of living will simply increase those figures.
