Naive consumers falling for marketing promises

Cape Town – In South Africa much more needs to be done – even at school and tertiary level – to make consumers more money savvy in order to protect them from “the hordes of vultures out there” trying to part them from their hard-earned money, according to Anneline van der Poel of debt management firm Debt Rescue.

She told Fin24 that she never stops being amazed by the naivety of consumers who come to Debt Rescue to be placed under debt revue.

“They have an almost child-like belief that false promises – which amount to outright fraud made by some telemarketers – are real. By simply saying yes to whatever concocted story the sales person has to offer, they end up with something which they don’t want and can’t afford,” warned Van der Poel.

Government could do more to incentivise saving in South Africa, while working to reduce household debt in order to get the economy back on track, according to the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT).

“South Africans are highly indebted, and the latest interest rate hike will only exacerbate debt levels,” said the institute’s Dr Co-Pierre Georg. “In this context, encouraging people to spend more might not be the best strategy.”

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Clark Gardner, CEO of consumer watchdog Summit Financial Wellbeing, told Fin24 it is of little use to save in the traditional sense when savings yield returns between 1% and 6%, while unsecured debt is attracting a total cost of credit rate between 10% and 450% per year.

“Our low savings rate is not a savings issue and, therefore, no incentive will improve this rate with any significance, as it is a debt issue,” said Gardner.

“South Africans are burdened with high costing unsecured debt and it will cripple the economic sectors relying on the purchasing power of the mass market. Instead we should do more to discourage the use of unsecured debt, especially payday lending (short term loans) that as a result of permissible initiation fees yield costs that cannot be justified.”

A small loan of R2 000 taken on the 10th of the month, for example, taken from a lender that settles the debt on a consumer’s next pay run could cost the consumer well over 400% in terms of an annualised total cost of credit rate.

“This is where the savings problem sits, as it creates debt spirals that incentivise desperate behaviour that is destroying finances in families around the country,” said Gardner.

He would, therefore, rather introduce laws that discourage payday lending by removing initiation fees and credit life insurance and enforce clear reckless lending rules. To correct the situation he would also pass legislation that allows the set off of unsecured debt against retirement savings under certain conditions.

READ: Saving in a rising interest rate environment

Speaking at the second annual AIFMRM Policy Forum on Household Debt and the Macro-economy, Georg said that, while the country does not necessarily need austerity measures, it does need to encourage judicious domestic consumption and get people to save – not spend – or at least to spend within their means.

“Spending per se is not bad but it needs to be balanced against debt, particularly household debt, which is too high in South Africa,” he said. According to the SA Reserve Bank, household debt is currently taking up as much as 78% of South Africans’ disposable income.

Guest speaker at the event, Professor Atif Mian from Princeton University said his research has shown a clear link between household debt and economic slowdowns and even recession.

One way to help reduce the burden on the poor was to lower interest rates, suggested Mian, while Georg added that people should also be motivated to save more.

“Government needs to incentivise savings more,” said Georg, pointing out that SA banks charge fees for depositing money, which is unusual compared to countries elsewhere. He said this did not encourage consumers to put their money in the bank and focus on saving.

“Properly incorporating household debt into macro models can have policy implications in terms of how we should regulate the market and how we should design the financial products in the first place,” said Main.

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