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Short-term loans not a quick fix

16 March 2018Sonja Visser, African Unity Life
Sonja Visser, CEO of AUL.

Sonja Visser, CEO of AUL.

The South African retail sector enjoyed increased levels of consumer spending during the December 2017 shopping season, according to point of sale data released by BankservAfrica earlier in February. It revealed that South Africans spent a total of R5.6 billion, compared with the same period in 2016 which saw total spend of R5.1 billion.

While this is good news for economists, the concerning reality is that many of these shoppers used credit, getting themselves into serious levels of debt in the process. Consumers may also have turned to short-term loans to make ends meet; either worsening their existing burden or quickly setting a spiral of debt into motion.

Low levels of financial literacy further compound the situation, says Sonja Visser, CEO of African Unity Life (AUL) which provides access to long-term insurance products to low- to middle-income earners. She says many consumers do not understand the basics of how different forms of credit work and, invariably, do not know what they are signing up for.

“Too many South Africans are unable to manage their day-to-day expenses; and there is low awareness of the need to be prepared for financial emergencies. It is important to be able to make informed financial decisions; to know how to live within your means and how to prepare for tomorrow.”

Millions of South Africans are debt-stressed

“74% of South Africans across all income brackets are over-indebted because they turned to short-term loans to fund their Christmas holidays without proper understanding of how micro-lending works,” says Karin Augustyn, a registered debt counsellor with Debt Hero (a division of Legal Hero).

A short-term loan is generally for a small amount of money, often has very high interest rates attached, and is usually repayable within one to three months. It is unsecured, which means that no policies or any other assets are handed over to the lender as security – as they would be if it was a vehicle or home loan.

Augustyn says that a staggering nine million South Africans are debt-stressed, and that many struggle for years to repay what they owe. “Short-term loans must never be used for day-to-day living expenses such as groceries or transport. If you think about it, your expenses generally remain the same month-to-month. So, if you need finance for this month’s groceries, next month you have to repay the loan and find the money for grocery shopping.”

She says this kind of loan should only be considered in an emergency. “For example, when you need access to a relatively small amount of cash at short notice; and only if you are certain that you will be able to repay it within the timeframe agreed with the lender. This is very important because you’ll be creating debt to settle debt.”

How to choose a short-term lender

For consumers who need to take out a loan and are confident they can meet the commitments, Augustyn says the following guidelines will help to ensure that dealings are only undertaken with a credible and trustworthy lender:

 • Always check if the creditor is registered with the National Credit Regulator Credit Provider (NCRCP) and visit the NCR website if in doubt:http://www.ncr.org.za/register_of_registrants/registered_cp.php
• Never handover your ID, debit card, South African Social Security Agency (SASSA) card or any other items of importance, as security
• Visit the lender’s office, ask questions and ensure that you are given five days during which to accept the loan
• Read the contract; if anything is unclear ask questions to make sure you understand the repayment conditions
• “Ts&Cs” is not a casual acronym. It stands for “Terms and Conditions” and holds legal power, which means that when you sign, you agree to abide by them
• Avoid internet loans, especially if you are asked to disclose personal information because this is often available to third parties

Decisions about the purchase of any financial product should not be done in haste. Visser and Augustyn agree that this is particularly true for anyone who finds themselves in an emergency, is vulnerable and under pressure to make a decision.

In closing, they advise to always shop around and to not be forced into anything, because decisions about finances need to be made with proper consideration and clarity.

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