Consumers are bombarded with conflicting messages on a daily basis: save, spend or spend to save! It feels a little like being pulled in two different directions constantly and at the end of the month, you’re still the poorer for it.
Reckless lending as well as high interest rates have been in the news for some time, and has informed much of the National Credit Act and so it should when a personal loan can cost you as much in interest as the capital amount by the end of the term.
So in 2016, what do you as a consumer need to know about reckless lending?
It is still happening daily
Capitec Bank, which has won a number of awards recently and is making healthy profits annually, has come under fire in recent months against accusations of reckless lending. It is still unclear whether these allegations are merited, as a lot of the argument is based on the amount of profit the bank is making.
If you compare this to the healthy profits PEP stores makes, it is not necessarily entrenched in high interest costs or reckless lending.
But in truth, all major financial services organisations in South Africa are faced with allegations of profiteering and extending lending where the consumer in question obviously could not afford the debt to a lesser or greater degree.
In essence, if the credit provider failed to do a proper assessment, and check credit history with credit bureaus as well as make risks, costs or obligations clear to consumers, this is deemed reckless lending. Equally if the new debt would clearly make the customer over-indebted, this would be deemed reckless lending.
There are also a number of loan sharks (or micro-lenders) in operation that target the most vulnerable in society, such as the poor and elderly to charge exorbitant interest rates. Consumers should always compare financial products and read the fine print relating to interest rates, bearing in mind that financial law and ethics are two distinct concepts. If lending is proven reckless, you do not have to honour the debt, but there are also other ways to avoid being exploited by loans.
Consumers could have grounds to insist that interest in arrears is unfair
The ‘in duplum’ (double the amount) common law rule provides that interest on a debt will cease to run where the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt, according to KPMG. It was developed in response to considerations of public interest, and seeks to protect borrowers from exploitation by lenders who permit interest to accumulate unchecked.
In other words if you borrowed R10 000, you should not have to incur more than R10 000 outstanding interest. There are certain exceptions to this rule that allow for debt to run at the agreed annual interest rate, however, that should be discussed with a lawyer as it can become quite complex.
Other protections related to credit under the National Credit Act
Among other, consumers:
- Have the right to receive information in plain language
- Have the right to receive documentation relating to the loan in their chosen language and format
- Are not lawfully bound by negative option marketing, where the consumer is forced to opt out of credit that will otherwise be unknowingly forced on them
- Are protected from credit sales at their home or work
- Benefit from interest rates and automatic limit increases being regulated
Full details in plain language are available here.
Consumers need to be honest but insist on their rights
If a consumer acquires a credit card by overstating their income, the credit provider would be protected from a reckless lending allegation, as long as they can prove the untruthfulness (for example through a signed document or recorded call).
Equally, consumers supported by consumer watchdog organisations and debt consolidation providers have the opportunity to insist that financial service providers take responsibility for their actions by taking them to task over reckless lending. You can find details for the credit ombud here.