If you are currently drowning in debt, there are two things you should know: firstly, you can recover from your financial problems, and secondly, you are definitely not alone. South Africans seem to be falling ever deeper in debt, and what is even more disheartening is that most people don’t realise the true state of their debt until it becomes a crisis.
According to Wikus Olivier, debt management expert at DebtSafe, “consumers’ debt is to such a degree that many of them are not only currently digging their ‘financial grave’, but already spinning in it.”
The National Credit Regulator (NCR) specifies that by the end of 2016, South Africans owed R1.69 trillion in debt to financial institutions, and further records indicate that South Africa had 24.31 million credit-active consumers. Over 14 million consumers were categorised in good standing and 9.76 million consumers had impaired records (end of fourth quarter 2016).
“Something drastic has to be done about the dreadful debt cycle that is destroying consumers in South Africa,” says Olivier.
The only way we can curb this debt crisis, is if consumers become more responsible when applying for credit and creditors become more cautious when approving credit.
“There are basically two sides of consumers’ debt coin,” continues Olivier. “On the one side, creditors may be responsible for ‘reckless lending’ to such an extent that consumers’ debt gets out of control. And on the other side, consumers can be guilty of ‘reckless borrowing’ by trying to take shortcuts when applying for credit or not knowing when to stop applying for it.”
Of course, there are also always those who find themselves in a predicament because life happened and they simply did what they felt necessary to do.
Reckless lending: when creditors are taking chances
“Reckless lending” is when a credit provider gives a consumer credit like a loan, for example, without following the proper affordability assessment guidelines. Olivier highlights that the National Credit Act of South Africa does not only set the ideal standard for consumers, but has certainly redefined the approach creditors can take when lending money.
Consumers need to be aware that creditors cannot grant credit the way they want to. There are certain requirements when it comes to the application and approval process.
Section 81 of the National Credit Act refers to an assessment consisting of the following:
1. Creditors need to review the financial or debt repayment history of a consumer.
2. Creditors need to take a thorough look at finance applications by assessing the consumer’s existing and future financial means.
3. Creditors need to ensure that consumers understand the risks, rights and obligations of the credit agreement.
The National Credit Amendment Act, 2014, also outlines the affordability assessment as the following:
• Calculate the consumer’s allocatable and discretionary income.
• Take into account all debts and repayment obligations via the consumer’s credit profile held by a registered credit bureau.
• Take into account maintenance obligations arising from statutory deductions or necessary expenditure.
It is important for consumers to note: a school or student loan, a pawn transaction or an incidental credit agreement (like a doctor’s bill not being paid) do not relate to reckless credit.
If the creditor fails to conduct the section 81 assessment, it is seen as reckless lending. This can result in a court matter – highlighting that the creditor was negligent. Olivier says: “Depending on the circumstances, the court may restructure the credit agreement, suspend it or forfeit it (write it off).”
Reckless Borrowing: when consumers need to start looking inward
Debt and finance management start from within. Not to sound to cynical, but the reality is that you, and only you, can and should take control of your spending and borrowing habits.
Borrowing money more responsibly goes hand-in-hand with planning. Compare rates and costs from different credit providers by doing the necessary research before applying for any credit.
Olivier says that consumers have a big responsibility when it comes to their credit applications. They have to fully understand the credit agreement(s) and they have to be honest in disclosing their finances. If you lie to a creditor about your expenses, debt and current financial situation it is seen as recklessness on your part. The risk involved, if the court proves that a client lied, is major trouble. Apart from this, it is a no-win situation for both parties (the consumer and creditor) as the client has to pay the penalty (forfeit) to the state instead.