The repayment of high-interest loans to unscrupulous moneylenders is a serious problem for many South Africans. Some borrowers even take on additional credit to pay off previous loans, and subsequently become trapped in a downward spiral of debt.
A 2017 South African Human Rights Commission study on the impact of unsecured lending and debt collection practices estimated that at least 40% of South African workers’ monthly income was directed towards repaying debt. Furthermore, around 80% of South Africa’s formal sector employees were subject to salary deductions for debt.
In extreme cases, people find themselves at the mercy of illegal lenders who may use threats, intimidation, asset seizure, and other underhanded tactics to claw back repayments.
JustMoney.co.za, a site that helps South Africans to make educated money choices, lists some warning signs to look out for when seeking a loan, and suggests alternatives if you are struggling to qualify for financing.
What is predatory lending?
Predatory lending refers to any loan practice that is unfair or abusive to the borrower. It typically happens when unscrupulous, and usually unregistered, lenders grant loans to people who are unable to qualify with registered credit providers. People who aren’t educated in money matters, and don’t know their legal rights, are particularly vulnerable.
There are several ways to recognise predatory lenders, says Shafeeka Anthony, Marketing Manager of JustMoney.co.za.
- They’re not registered. The most obvious difference between authorised and unauthorised lenders is that the former are registered with the National Credit Regulator (NCR). Registered lenders must display their NCR registration certificate and window decal.
- No credit checks. Loan sharks don’t conduct credit checks or affordability assessments. They may also ask for upfront payment to secure the loan before granting it, which a registered lender would never do.
- Loans despite “blacklisting”. Predatory lenders advertise that “blacklisted” clients are welcome. This term, which is no longer in use by the NCR, refers to a consumer having been refused an interest-bearing loan, or credit, due to having a negative reputation with creditors who use credit bureau services.
- High interest. Predatory lenders charge unreasonably high interest rates. A 2020 report on reckless lending, conducted by the Black Sash and the London School of Economics and Political Science, revealed that predatory lenders charge excessive interest rates of anything from 50% to 112%.
The maximum interest rate on unsecured loans, such as personal loans, is currently 28.75%, so you should not pay a higher rate, advises Didi Sebothoma, stakeholder relations officer at the NCR. He advises borrowers to seek advice from the NCR if they’re uncertain about the interest rate attached to a loan.
Be aware that predatory lenders may steal the registration numbers of registered credit providers, so do check the NCR registrants’ list to verify details. Any irregularities can be reported using the NCR complaint form. You can also telephone the NCR on 0860 627 627 or 011 554 2700.
Alicia Moses, senior consumer education specialist at the Financial Sector Conduct Authority (FSCA), lists additional warning signs to help you spot predatory lenders.
- Contracts: They fail to put a legally binding contract in place.
- Questionable loan arrangements: Theymay pressure you into taking out a short-term loan, then recommend you take out another loan to pay off the first loan.
- Interest rates: They advertise interest rates that seem too good to be true, for example 5% a year, but demand an upfront payment before granting you the loan (assuming you actually receive it).
- Identification: They ask you to hand over your identity document, bank or SASSA card to secure a loan. This is illegal.
Options if you struggle to qualify for financing
If you are struggling to qualify for a new loan with a registered credit provider, JustMoney advises the following:
- Sell an asset to free up funds.
- Consider accessing funds from an existing home loan.
- Examine your budget and consider where you could cut back on expenses.
- Improve your credit score, which is a measure of your ability to pay your bills and manage your debt.
“Debt is not problematic in itself,” says Anthony. “If you borrow from a reputable financial institution, within the limits of your financial capacity, you could access a mortgage loan or funding for tertiary education. This should improve your living standards in the long term.
“Bad debt is when you take on a loan to consume beyond your means, and splurge on items such as the latest fashion or tech gadgets. You are stealing from your future with few benefits to show for it.”
It’s far better to improve your financial literacy, says Anthony, and avoid being tempted by unsolicited mail and phone offerings for loans and credit. Don’t be waylaid by misleading advertising or coercive sales techniques from aggressive agents.
“If you decide to apply for a loan, do your homework first. A reputable lender will explain any fees and interest that will accrue, including a possible loan initiation fee, before you sign an agreement,” says Anthony.
JustMoney.co.za is a trusted voice within the personal finance sector. The JustMoney website offers articles, money management tools and a wide range of financial products and services. Over 250,000 South Africans subscribe to the newsletter to stay informed and become financially savvy. Find the website here.