Warning to South Africans with debt

In order to make ends meet, many South Africans are turning to loans that they cannot afford, with predatory lenders taking advantage of the country’s most vulnerable people.

A Debtbusters study found that, on average, South African consumers spend 68% of their take-home pay on debt service.

This study, which looked at spending patterns across five income groups of consumers who applied for debt counselling, found that South Africans who earn less than R5,000 a month spend more than half of their non-debt-repayment disposable income on groceries.

With people struggling to stretch their salaries until the end of the month, many may be tempted to take out loans.

However, this desperation also makes people more susceptible to falling victim to predatory lending practices, such as payday loans, car-title loans, and loans they cannot afford to pay back.

Notably, over 42% of the country’s 23 million credit-active consumers are classified as having impaired credit records.

National Debt Advisors debt counsellor Samantha Moyana explained on Kaya Biz that misinformation is a key reason why people fall prey to predatory lending practices in South Africa.

“Reckless lending refers to a practice of providing credit to a consumer without properly assessing their ability to repay the debt,” Moyana said.

“This can lead to the consumer becoming over-indebted and struggling to meet their repayment obligation.”

“Due to people having a lack of knowledge when it comes to applying for debt and their rights, they find themselves being trapped in reckless lending situations.”

This also happens because credit providers aren’t always fully transparent with the consumer about the terms and conditions when they apply for a loan.

In some cases, consumers also provide incorrect information about their financial situation and are given loans that they can’t afford.

For example, if they know that the provider won’t verify their information, they may claim that they are still living with their parents – which would make it seem like they have more disposable income – when, in reality, they are renting every month.

Predatory lending and vulnerable populations

Moyana explained that, apart from misinformation, many people also fall victim to predatory lending as a result of high inflation.

“So many people resort to applying for so much credit because their salaries or their income is not sufficient to sustain them for the entire month,” she said.

Because of this, many people are being exploited by predatory payday loans that charge excessive interest rates and ultimately put consumers in a much worse financial position.

According to DebtBusters, payday loans have become a lifeline for many households but are very expensive, with interest rates often over 25% per annum.

“Social grant beneficiaries in South Africa are very vulnerable to predatory lenders for several reasons,” Moyana said.

“They often rely on their grants as their primary source of income, making them more vulnerable for exploitation, because they may not fully comprehend the terms and conditions and the agreements.”

“The lenders can also provide them with misleading information about the loan products, hiding true cost just for them to make that sale.”

According to Moyana, both the credit provider and the receiver have a responsibility to avoid predatory lending practices.

“Credit providers must disclose all terms and conditions, including interest rates, fees, and repayment terms.”

“They also need to assess a consumer’s ability to afford the credit before granting it.”

“If they cannot afford this, maybe they can also offer other options. Advise the client as well. Being transparent is very important.”

Moyana explained that while credit providers must conduct extensive due diligence before providing a loan, people applying for credit also need to be careful.

“It is important to educate yourself and assess affordability. Understand all terms of any credit agreement and seek legal advice if unclear. You have the right to seek legal advice. And then be wary of misleading offers.”

“Stay cautious of offers that seem too good to be true because you cannot be earning R5,000, and then you’re being offered a loan of R200,000. How do you think you’re going to pay that back?”

Moyana urged people to be cautious and report any unethical lending practices they come across.

“If you do suspect legal breaches by a credit provider, report them to the National Credit Regulator,” she said.

“If you find yourself overwhelmed with your debt, consider debt review, legal processes that will help you manage through your structure affordability repayment while providing legal protection from creditors.”