One money trap South Africans should avoid

Experts warned that South Africans need to think carefully before borrowing money, particularly from unregistered lenders, since this could result in excessive fees, high interest rates, and exploitative collection practices. 

This warning follows a nationwide crackdown by the National Credit Regulator (NCR) and the South African Police Service on illegal microlenders, also known as “mashonisas”.

Weariness of microlenders is especially important during the December to January period, since most households feel the financial pinch ahead of the festive season and the start of the new year.

December sees South Africans shelling out for festive spending, which includes costs like trips, clothing, home decor, gifts and food.

In January, back-to-school preparations also mean that many households have an array of expenses that need to be covered. 

Adding to the financial strain, from December to January, most salaried workers in South Africa face a payday gap, which is around one week longer than usual. 

This is because salaries are typically paid early in December, when offices close for the holidays. All of these factors make loans from microlenders seem especially appealing.

However, while taking out a quick loan may appear to be a lifeline to make it through the month, these often come with hidden dangers, such as excessive fees, high interest rates, and unscrupulous collection practices. 

“The financial exclusion of many individuals and small businesses – owing to lack of credit history, collateral, and high banking costs – has fuelled the rise in informal lending practices,” said Mettus’ Head of Credit Analytics, Siva Dhever.

“Our insights suggest a 2% year-on-year increase in microlenders, with 4,622 operating in the country as of August this year.” 

Dhever added that they have also seen a 14.5% surge in consumers with microloans over the past year, up from 2.66 million to 3.12 million.

Avoiding the debt trap

To mitigate instances of consumers falling into a trap of over-indebtedness, financial education, credit counselling, and the enforcement of fair lending laws are critical. 

These measures help borrowers make informed decisions and avoid escalating debt that they will struggle to repay.

Before taking on new credit, Dhever said consumers and small business owners must verify a lender’s credentials before signing and be aware of clear warning signs that could indicate a potentially harmful lending agreement. 

Such examples include the lender being unregistered, high interest rates, pressure to sign quickly, demands for unusual collateral or threats, vague loan terms, and aggressive marketing or unsolicited offers. 

“During financially stressful times such as December, borrow only what you can realistically afford to pay back,” Dhever said. 

He stressed the importance of only utilising the services of reputable lenders that are registered by the NCR, and ensuring that all fees and terms are clear and easily understood.

“Where possible, consider budgeting, saving, or seeking other low-cost alternatives before taking on high-interest loans,” he said.

Despite short-term borrowing providing much-needed but temporary relief, the only way to build a fair and sustainable microfinance sector in South Africa takes more than consumer caution alone, Dhever said. 

Stronger regulation, greater financial inclusion, borrower education, and social support are crucial to ensuring that lending institutions serve public needs responsibly. 

Here, transparent, data-driven practices will be instrumental in ensuring fair pricing, responsible risk assessment, and building a foundation of trust between lenders and consumers. 

“When consumers are empowered through education and lenders are held to fair standards, all South Africans will reap the benefits,” Dhever added. 

“If we can achieve this, we can build a more financially secure South Africa – one where credit serves as a tool for progress, not a pathway to debt and greater despair.”