Many micro lenders employ shrewd marketing strategies to separate consumers from their wallets.
A classic example is the predator loan that is rolled over from month to month. The consequences are the following:
- They make the consumer a slave to the lender;
- Consumers are not made aware of the cost of credit;
- The work performances of employees deteriorate due to debt related stress and it leads to absenteeism from the workplace.
- Consumers in the lower income groups are prevented from being economically active – see explanation below.
When perusing credit bureau reports of consumers it is not uncommon to find several loans recorded under the profile of one credit provider – for example: a new loan for every month of the year. All of these loans are settled except the last one.
Some credit providers are taking advantage of Regulation 42 of the National Credit Act which regulates the maximum interest rate and initiation fees for ( inter alia) short term credit transactions (a cash loan of up to R8 000.00 for a period of up to six months). It states:
- An interest rate of 5% per month.
The initiation fee is calculated in a similar manner as for other loans:
- R150.00 per credit agreement,
- Plus 10% of the amount of the agreement in excess of R1 000.00
- But never to exceed R1 000.00.
It is more profitable to grant a cash loan of R2 000.00 at 5% interest and collect the initiation fee in the amount of R285.00, because at the end of the month the credit provider collects R2 399.25 from the consumer.
The lower income groups are usually targeted for this kind of loan and a repayment of R2 399.25 leaves a consumer out of pocket – there is not enough money to pay for necessary living expenses. Sadly, the consumer now has no alternative but to apply for a new loan and pay R399.25 in cost and interest all over again.
Over a period of twelve months the credit provider would have received R4 791.00 profit – and the consumer still owes the original R2 000.00.
The alternative would have been to grant the R2 000.00 over a 12 month period. The total amount repayable (including the R285.00 initiation fee and interest at the prevailing interest rate) would amount to R2 686.66 with a monthly instalment of R223.88. The profit for the credit provider amounts to R686.60 for the year.
It is evident that greed is the main driver by opting to grant month to month loans and that the welfare of the consumer takes second place.
It is also obvious that a proper affordability study could not have been done at the onset if a consumer has to return on a month to month basis to take up a new loan.
There is a good argument to be made that this type of loan could be declared reckless as it should be clear that the consumer cannot afford such a large instalment, and therefore the credit provider should not advance the amount over a period of one month.
If found to be reckless, all the loans except possibly the first one may be set aside by way of a Court order and the credit provider could be ordered to repay the capital for every loan that was subsequently granted, together with interest and charges.
The effects these types of loans (together with the indiscriminate granting of bigger unsecured loans to households) is a major concern. Firstly it is a major contributor to poverty in our country, and secondly the consumers are effectively removed from being economically active as all their disposable money go towards servicing their payments towards these loans.
It is recommended that employers should have a financial wellness program in place that teach employees the basics of money management and avoid pitfalls as described above.
Norphil Debt Counselling
Cell: 082 953 8434
Fax: 0866 99 5291