South African households owe a total of 158.9 billion (US) dollars, according to data reported at the end of 2022 by the economic research company CEIC).
Worryingly, the amount of debt is 12 USD bn higher than the previous quarter, when it sat at 146.9 USD bn. And what’s even more concerning is that that this is only the OFFICIAL figure. There’s a lot more debt in South Africa which has gone unrecorded, because it’s been provided by unregulated lenders.
The actual debt figure is calculated as a ratio of debt versus income. So, it’s perhaps not surprising it was high in December – a period where traditionally we spend more money for Christmas. The good news though, is that disposable income increased at a faster pace, rising from 7.5 per cent in the third quarter to 8 per cent by December. That’s according to a report by the South African Reserve Bank. Further optimism came from the employment sector, where the numbers with a job jumped by 1.1 per cent.
But South Africa, like the rest of the world, is undergoing a cost of living crisis, with rising food and utility costs. Inflation hit seven per cent back in February this year and it’s not going down any time soon. Utility bills are increasing and petrol too is higher than it’s been in years. It’s not unreasonable to assume then, that the national household debt figure is going to increase.
Regardless of what the debt is used for – everyday living, consumer goods, holidays or a car – it’s still to be paid back. And whether that’s done in an affordable fashion, or one which locks families into an ever-increasing debt spiral depends on the terms of the loan in the first place.
Back in 2005 the South African government at the time introduced the National Credit Act. This introduced policies aimed at ensuring responsible lending practices. This was to prevent individuals falling into huge debt they were unable to repay. It was also to clamp down on lenders charging soaring interest rates. As such, maximum limits on total interest charges were introduced.
Today, limits are still in place, with official lenders answerable to the country’s National Credit Regulator (NCR). And it appears to be working. By far, the majority of the new generation of online regulated lenders in South Africa are committed to responsible lending practices.
Responsible lending practices from online lenders
- Providing flexible loan plans. Allowing lenders to choose how much to borrow and over a period that feels comfortable for them.
- No endless ‘roll over’ balances. No rolling over balances and interest payments so that the debt gets harder to pay off. Extensions are given only if it makes financial sense for the borrower.
- Transparency over amounts. Lenders are shown upfront exactly how much the loan will cost ie with fixed interest charges made clear.
- Credit checks. Borrowers have to prove that they will have the financial means to repay the loan. That means, for many online lenders checking credit histories, employment status and income.
- Trust ratings. Only regular borrowers will see an increase in the amount they can take out a loan for. But this doesn’t mean the figure continues to rise. Borrowers may be restricted if their recent credit history gives cause for concern.
Meanwhile, back to the National Credit Act and today’s maximum interest rate figures on particular types of lending. These range from personal short-term loans, business borrowing and taking out money via credit cards.
Maximum fees for different types of borrowing
Mortgage agreements
R1, 000 per credit agreement, plus 10 per cent of the amount of the agreement in excess of R10, 000. But, never to exceed R5, 000.
Credit facilities
R150 per credit agreement, plus 10 per cent of the amount of the agreement in excess of R1, 000. But, never to exceed R1, 000.
Unsecured credit transactions
R150 per credit agreement, plus 10% of the amount of the agreement in excess of R1, 000. But, never to exceed R1, 000.
Developmental credit agreements:
For the development of small business
R250 per credit agreement, plus 10% of the amount of the credit agreement in excess of R1, 000. But, never to exceed R2, 500.
For low income housing (unsecured)
R500 per credit agreement, plus 10% of the amount of the credit agreement in excess of R1, 000. But, never to exceed R2, 500.
Short term credit transactions
R150 per credit agreement, plus 10% of the amount of the credit agreement in excess of R1, 000. But, never to exceed R1, 000.
Other credit agreements
R150 per credit agreement, plus 10% of the amount of the credit agreement in excess of R1, 000. But, never to exceed R1, 000.
Cap on maximum service fee
In addition to a cap on interest charges, the Act also introduces a maximum cut-off point for services fees at R50. This is regardless of whether the service fee is paid periodically or per transaction (ie credit cards).
And what of unregulated lending charges?
The above figures are, as we stated earlier, for regulated lenders. But what of unregulated lenders (or ‘loan sharks’). Unfortunately, these lenders aren’t beholden to the government’s interest rate rules – to the extent borrowers can find themselves paying up to 50 per cent of the cost of the loan in interest payments alone.
So, why use an unregulated lender then? Well, this is where the great dichotomy arises. It’s far easier for someone with poor credit history and no job to seek funding from an ‘underground’ lender. That’s because they often won’t pass the government’s strict lending criteria instituted by regulated lenders. In other words, they have no choice, especially when the money is needed for everyday living costs ie simply ‘getting by.’
Short of clamping down further on unregulated lenders, the only way the government can help many of those caught up in this conundrum is by softening its lending criteria. At the same time, they can make it compulsory for those taking out debt to undertake a financial education programme to prevent them falling in to the red in future.
