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Easy-credit bomb set to explode

SOUTH Africans living for years beyond their means on debt now owe R1.45-trillion in the form of mortgages, vehicle finance, credit cards, store cards, personal and short-term loans.

Unsecured loans, taken out by people who don’t often qualify for credit and which must be repaid at heavy interest rates of up to 45%, grew sharply over the last five years. But the unsecured lending market came to a screeching halt in recent months as banks and lenders became far more strict.

People who until now were borrowing from one lender to repay another older loan are now being turned away — a scenario that could lead to Marikana-style social unrest, and put pressure on companies to pay higher wages so people can afford to repay loans.

Predatory lenders such as furniture retailers who have skirted an ethical line for years by tacking on hidden charges into “credit contracts”, are now likely to face a backlash.

The share prices of furniture retailers such as JD Group and Lewis seem relatively cheap compared with those of clothing and food retailers Mr Price and Woolworths, but their profitability is expected to be affected by stretched consumers who have borrowed money and find it hard to pay back loans.

Lenders responded by giving out loans for longer periods. Consumers pay the same instalments, not realising they’re paying more for longer. This enables lenders to cash in.

Behavioural studies show that consumers do not look at the interest rate, but rather only what they can afford to repay.

Unsecured lenders have become creative in bolting-on products to charge consumers more.

For instance, retailers tell consumers that they need to take out a “credit life policy” if they buy furniture on credit. Though it is illegal to force the consumer to take the policy from the company from which the product is being bought, the retailer generally offers a product that will be granted immediately while it takes a lot longer to process a competing life policy.

While lenders are prohibited from charging more than a certain interest rate for goods bought on credit, the lender can exceed that limit by tacking on the extra “insurance” charge.

Lewis, the JSE-listed furniture retailer, says in its contract it will charge consumers R12 every time a collections agent phones them if they are in arrears or R30 when someone visits.

With about 210,000 clients in arrears, according to Lewis’s most recent annual report, it amounts to R4.8m a month, or R60m a year, if each client gets an extra two calls a month asking them to pay.

At Capitec, if you take a one-month multiloan and pay it off, the bank asks via SMS if you would like another loan — then it charges a new initiation fee.

One of the most exploitative practices is that of “garnishee orders”, where a court instructs employers to deduct an amount from someone’s salary to repay a debt. But there is no central database that shows how much of his money is already being deducted, so often he is left with no money to live on.

One factory manager says about 70% of his employees do not want to come to work.

His staff, he said, had garnishee orders attached, so they were highly indebted and not motivated to work because they would not see their salaries anyway.

Many of these garnishee orders submitted to companies telling them to deduct money from their staff’s salaries are not even legal, according to investigators.

This problem was flagged by Planning Minister Trevor Manuel, who said recently that the debts owed to microlenders were a key factor driving the miners at Lonmin’s Marikana mines to demand higher wages.

One microlender in the area had been charging 30% a month.

One fund manager who has investigated the market said the best target for unsecured lenders used to be government employees: they never lost their jobs, they got above-inflation wage increases and were paid reliably.

But this has changed as government employees have been given so much credit in recent years that they are now taking strain.

Debt among the youth is rising rapidly, too.

A study by Unisa and a student marketing company says the number of young South Africans between 18 and 25 who have become over-indebted has grown sharply, with student debt double what it was three years ago.

University students can get credit cards as long as they receive a steady income of as little as R200 a month from a parent or guardian.

What this means is that about 43% of students own a credit card, according to the 2012 survey, up from 9.5% in the 2010 survey.

Absa has the largest slice of the student debt pie (40%), followed by Standard Bank (32%).

Neil Roets, CEO of Debt Rescue, said the proliferation of credit cards could not be blamed for the explosion in over-indebted young consumers, but it had become easier for consumers to get unsecured loans.

“About 9-million credit-active consumers in South Africa have impaired credit records. That is almost half of all credit-active consumers in the country.”

The problem has had ripples overseas too.

In Britain recently, Archbishop of Canterbury Justin Welby met “payday lender” Wonga, criticising the company and competitors for their “excessive rates of interest”.

The archbishop has set up a non-profit credit union, which charges low rates of interest on loans by the clergy and staff.

The UK’s office of Fair Trading has referred the “payday loans” market to the Competition Commission, saying there are deep-rooted problems with the way competition works and that lenders are too focused on offering quick loans.

This came after a year-long review of the sector exposed widespread evidence of irresponsible lending and breaches of the law, which Fair Trading said were causing “misery and hardship for many borrowers”.

Hard lesson

JANET was retrenched in May 2008 from the company where she had worked for 19 years. That was two months after her partner was retrenched. They pooled their pension payouts and opened a car wash.

At the time, Janet (now 59) had four credit cards, each with debt of about R40,000.

The couple had insurance cover for loss of jobs, but instead of getting the R42,000 they were due they got only R12,000. They took bonds on the house to get through the tough time.

The car wash operated for 18 months, and then closed in June 2009 when the economy dipped.

By 2010, the couple owed R1.5m. A garnishee order was obtained on Janet’s salary. The couple were placed under “debt review”, and now owe over R900,000 on their home.

“I can’t tell you the number of calls I still get from all the banks saying I have pre-approved loans of R100,000, R120,000,” she says.

“It’s a lesson we were taught. It was two months to go, and we just prayed. The day they were coming to take the car, one of the branches I used to work at phoned and asked if I wanted to come back.”

Back from brink

JOHN started with 35 creditors and more than R3m debt three years ago. An electrical engineer, he had four properties and banks were happy to provide credit of about R100,000.

“I borrowed and bought a lot of things that weren’t necessary. A new living room, TVs, nice stuff,” he says.

The recession hit, and people were not building as much. Construction came to a standstill. One big client did not pay, and John used his credit card to pay salaries. He was forced into debt counselling.

John says he is fortunate he is a business owner and is again in a good position, turning more than R400,000 to R500,000 a month. He had to sell three of his houses and was left with his home where his only outstanding debt is R400,000.

John says the banks are only partially to blame. “I was supposed to check whether I could afford it.”

He paid off the smallest debt first, and worked his way up. He wasn’t particularly impressed with the banks. They kept charging interest while he was in debt counselling.

And he says debt counselling is not a salvation.

“It was supposed to be a six-year period, but it was three years.” This was because he got his business making money again. He terminated debt counselling and spoke to banks directly.

Debt counselling protects a person’s assets. Creditors can’t take away someone’s property or vehicles.

“The one good thing that happened through the whole thing is it taught me a lot of self-discipline.”

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