Consumer Debt in South Africa
Consumer debt is a major problem in our country. For this reason, we should all be at our most vigilant, when it comes to over-committing ourselves to consumer debt.
South Africa’s economic troubles are nothing new. But, as a credit rating downgrade to junk status looms ever closer, consumer debt has never been a more pressing issue.
Consumers may have been somewhat relieved by Finance Minister Pravin Gordhan’s budget speech. However, in the wake of devastating drought, sharply climbing food prices, the recent electricity tariff and fuel levy hike, imminent job cuts and an unemployment rate of over 25%, this year is not looking good at all.
With prospects as bleak as they are, the granting of credit is a crucial issue, as consumers are feeling extremely exposed. Out of desperation, they are turning to consumer debt as a means of survival. In some cases, they are taking out unsecured loans just to buy groceries.
Disturbingly, many consumers are lying in their credit applications, due to their desperate situations. They don’t consider how they will service their consumer debt and cannot afford the interest they are charged. Either way, credit is a high-risk industry.
The DTI’s Agencies
Department of Trade and Industry (DTI) agency, the National Credit Regulator (NCR) regulates the granting of credit in South Africa. On 14th September 2015, the NCR curbed access to credit by amending the National Credit Act (NCA).
These amendments enforced stricter requirements for performing affordability assessments. It had been a long time coming. In 2012, the NCR commenced research into unsecured personal loans – and creditors braced themselves for what was to come.
Last week, the DTI’s agencies – the NCR, the National Consumer Commission (NCC) and the National Consumer Tribunal (NCT) presented a two-day conference in Sandton. At which, the agencies examined consumer protection in the credit market.
A Grim Picture
The regulator’s statistics manager, Ngoako Mabeba painted a grim picture of debt in our country.
“Consumers owed R1.63 trillion at the end of September last year. (Around) 23.45 million consumers are credit-active – 57.7% (13.53 million) of them are in good standing, but 42.3% (9.91 million) are classified as impaired consumers because they have some form of an impaired record.” An impaired record refers to having missed one or more payments.
Of that R1.63 trillion consumer debt, mortgages comprise R862.23 billion. Whereas R361.34 billion comprises secured debt, R212.04 billion credit facilities, R3.23 billion short-term loans, R32.25 billion student loans, and troublingly R161.76 billion unsecured credit.
“The number of accounts listed at the bureaus at the end of September was 80.6 million, 74.9% (60.37 million) were in ‘good standing’ but 25.1% (20.24 million) accounts had impaired records,” Mabeba informed delegates.
Sobering Case Studies
The regulator’s compliance manager, Louisa Hetisani built on this by looking at affordability assessments and whether these were being imposed.
She presented two very sobering case studies. The first case study involved Ms Y from Mpumalanga. She earned a R1 300 net income and received no salary advice. The credit provider’s affordability assessment form showed that Ms Y spent R400 on food monthly.
It also showed that she earned a R900 disposable income. The form did not take any of her other expenses into account, such as medical expenses, accommodation, transport, etc.
A copy of Ms Y’s credit report revealed that between 5th August 2014 and 3rd November 2015 she was granted 15 loans by the same credit provider. On 30th November, Ms Y then took out a R1 300 loan for a 3-month repayment term at R577.45 monthly instalment.
The second case study involved Ms X from the Free State. She earned a monthly salary of R3 066.84. On 30th November, she took out a R3 500 loan for a 3-month repayment term at R1 051.86 monthly instalment.
Her credit report revealed she had three retail clothing accounts that were in arrears. On one of these accounts, she had been in arrears for nine months. Every month, all of these accounts would cost her R4, 475 in total monthly instalments.
Between 27th October 2014 and 29th October 2015, Ms X was granted 15 loans. All of her loan applications were approved, despite the negative information on her credit report.
From these case studies, it’s painfully evident that credit providers are flouting affordability assessments.
Since September 2015, the NCR has performed over 110 onsite raids across the nine provinces to enforce affordability assessment compliance.
They discovered very few credit providers to actually be compliant. Hetisani said “The old way of doing things still applies. Lending is done on the basis of trust… Pay slips, bank statements and credit reports are often missing or out-dated.”
“Loans are often granted to consumers under debt review, administration or where financial distress is clearly evident from the credit bureau report.”
The NCR also discovered “overcharging on interest and fees, payment processing fees are passed on to the consumer.”
Investigations and enforcement department manager, Jacqueline Boucher said that “(In the Cape) raids were conducted on entities which would generally service farm workers.”
The NCR discovered “(high) levels of consumer over-indebtedness, reckless lending and borrowing, the overpricing of credit life… miss-selling of credit insurance; lending using social grants; debt farming (more add-ons to the cost of credit); illegal wage garnishing; inclusion of prohibited fees in cost of credit; and reckless lending.”
The burden lies on credit providers to make sure the consumer can afford to repay the debt they are granted, said Hetisani. Credit providers are obligated to “take practical steps to assess discretionary income to determine financial means and prospects.”
Consumers have rights. And with these rights, comes the responsibility to be honest about our financial situations, when applying for consumer debt. Unfortunately, some individuals are so desperate, they will take money wherever and however they can get it.
- Don’t just sign: make sure you get a pre-agreement statement and quote before signing any credit agreement, so you know what you’re getting into. If you don’t understand something, ask for clarification.
- Be truthful: be sure to truthfully disclose all information submitted to the credit provider and make sure they are registered before entering any agreements.
- Don’t over-borrow: only take out what you need. Greed will get you into big trouble.
- Avoid interest: don’t spread payments out over a drawn-out repayment term. Interest will add up and you will end up paying a lot more.
- Understand insurance: If a credit provider offers you credit insurance, be certain you understand all of the terms. That way, when you claim benefits, there will be no surprises.
- Be practical: draw up a monthly budget and follow it precisely. Calculate your monthly household income and total expenses. After covering all of your expenses, can you afford to repay a new debt?
- Save: Always make room in your in your budget for savings. You never know when you will need it. It’s the only way to secure your financial future.
- Check your credit report: Pull a copy of your credit report regularly. This will allow you to rectify any inaccuracies. The NCA entitles you to a yearly free copy of your credit report from each of the credit bureaus. An extra copy will cost you only R20, VAT excluded.