Government measures to help consumers fight debt backfire

Only 21c in every rand is available to the average South African household to pay for living expenses. Despite measures in the last two decades to curb levels of household indebtedness, the rest is used to pay debt

What’s more, of the 20 million credit-active consumers in this country, 47% are in arrears on their accounts by three months or more, have had judgments against them, or have had negative ratings on their credit record, according to the National Credit Regulator.

Three major measures have been taken in the last decade to try and improve the financial position of the average South African consumer.

The first was the National Credit Act (2005), which was intended to protect the consumer and make credit and banking services more accessible, said the Banking Association of South Africa.

The second was the consistent lowering of interest rates over the last seven years (with two small exceptions in 2008 and 2014 when it rose by 0,25%), and the third a credit amnesty, which in effect wiped the slate clean for 3,1 million South African consumers with poor credit records.

The National Credit Act

The National Credit Act did three major things to relieve pressure on consumers, said Neil Roets, CEO of Debt Rescue. The first was to monitor and prevent reckless lending, provide guidelines about interest rates and fees, and introduce debt counselling to over-indebted clients.

The more recent National Credit Amendment Act (2013) also prohibits credit providers from collecting certain prescribed debts, such as clothing accounts and cellphone debt. A prescribed debt is one that is older than three years, and if there has been no payment, no debt acknowledgement and no summons, it is written off. This does not apply to taxes, home loans and TV license debts, though. These have a lifespan of 30 years.

The first act also put the onus on the lender to explain the terms of the loan to the borrower, and to do an affordability test.

Read more: Know your credit rights

It is difficult to narrow it down to a single cause, but while South Africa’s level of household debt is at 79% of disposable income, that in the UK is at 144%, and that in Sweden at 170%. So, while our household debt is high, it is lower than that in many other countries. The National Credit Act of 2007 is often held partially responsible for this.

. . . of the 20 million credit-active consumers in this country, 47% are in arrears on their accounts by three months or more

The downside of making credit from financial institutions less accessible for pressurised consumers, is that it has forced many people with irregular incomes or bad credit records to make use of the services of unscrupulous lending agencies.

These so-called loan sharks often operate outside the law, charging crippling interest rates to their desperate customers, far in excess of that stipulated by the National Credit Regulator. These are often micro loans, or so-called payday loans, where interest charged can be extremely high, and is sometimes calculated by day, not per week or per month. Vulnerable and poverty-stricken people are ruthlessly exploited, and are seldom in a position to take legal action.

Once in this vicious cycle, it is almost impossible to extricate oneself, as more money is borrowed to pay for day-to-day expenses. Some loan sharks are also notorious for confiscating the ID books and bank cards (with PIN number) of their clients until the loan is fully paid up.

Interest rates

South African interest rates have been kept reasonably low in the last seven years. “This means that clients pay a smaller monthly minimum instalment on their debts. It also supposedly lowers the cost of goods and services,” said Roets. He added that he expected the interest rate to rise in the near future, putting further stress on over-indebted consumers.

When the Reserve Bank reduces the interest rate, it is hoped that the economy will be stimulated, and that people will use the opportunity to pay off their debts more quickly. But the skyrocketing cost of living in South Africa has made this difficult for many cash-strapped consumers.

There has, in fact, been an increase in non-mortgage lending from 39% in 2007 to 46% in 2012, according to the South African Reserve Bank. And the percentage of disposable income used to pay and service debt is rising.

Credit amnesty

The credit information amnesty that was implemented on 1 April 2014 caused a great deal of confusion, according to Roets. Many people were under the impression that their debt would be written off, when in actual fact all that happened was that their bad credit records were expunged.

It created problems, said Roets, because credit providers had difficulty in establishing whether a prospective client was creditworthy, and it also meant that some creditworthy clients were subjected to unnecessary scrutiny.

And not only that, it also put over-indebted consumers in a position to obtain more loans, which they could not have afforded in the first place.

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