Our director Matthew Thomson recently spoke with business and finance journalist Fiona Zerbst of JustMoney on the subject of predatory lending and the safeguards of the National Credit Act. JustMoney’s article is available at: https://www.justmoney.co.za/articles/how-to-identify-predatory-lenders/ and below:
How to identify predatory lenders
Disreputable, or predatory, lenders can trap you in an unsustainable debt cycle. We consider how to identify such lenders and how to access funds without them.
Predatory lending refers to any loan practice that is unfair or abusive to the borrower.
It typically happens when unscrupulous, and usually unregistered, lenders grant loans to people who are unable to qualify with registered credit providers, or who don’t know the difference between reputable and disreputable lenders.
This article explains how to identify and avoid predatory lenders; and how to access credit without them.
What exactly is a predatory lender?
There is no direct mention of predatory lenders in the national credit act (NCA), says Matthew Thomson, a director of litigation at DML Attorneys; however, predatory lending practices are covered in the national credit bill and the NCA regulations.
“The NCA guards against predatory lending by regulating over-indebtedness and reckless credit,” he explains.
Reckless credit (or reckless lending) refers to an agreement entered into:
- Without the credit provider having conducted an affordability assessment; and/or
- With the credit provider having disregarded indications that the borrower did not understand the risks, costs, or obligations involved.
How South African consumers are taken in
South Africans have become accustomed to taking out loans to survive the high cost of living. According to the latest DebtBusters Debt Index, some 96% of consumers who applied for debt counselling in Q4 of 2022 had some form of unsecured debt – meaning, debt that is not secured by an asset. Further, around 8% of this group had turned to unsecured lenders for financing.
Taking out loans to pay off other loans is another practice that keeps consumers trapped in the debt cycle, says Ayanda Ndimande, head of Business Development at Sanlam Retail Credit – especially when those loans are taken with predatory lenders.
“Out of desperation, people turn to unregistered moneylenders when they can’t repay their debts, worsening the situation,” she says.
Disreputable lenders typically impose unmanageable loan terms, such as excessively high interest rates, which can keep borrowers stuck in a loop of increasing debt, and unable to exit the predatory arrangement.
Aside from incurring excessive debt, borrowing from such lenders can put the borrower’s credit score, financial reputation, and financial future at risk.
How to spot a predatory lender
They’re not registered
The most obvious difference between authorised- and unauthorised lenders is that the former are registered with the National Credit Regulator (NCR).
“In terms of section 40 of the national credit act, any person or entity that provides loans or extends credit with interest must register as a credit provider,” notes Thomson.
“A credit lender must go through a registration process to comply with the NCA, and provide annual proof of compliance and reports to the NCR.”
Thomson says lenders who fail to comply risk having their registration cancelled. Further, they will incur penalties, and they may be tried for an offence.
Didi Sebothoma, stakeholder relations officer at the NCR, says registered lenders must display their NCR registration certificates and window decals. If a lender has not displayed its certificate, you’re entitled to ask to see it. The certificate must contain a registration number that stands up to verification with the NCR.
Be aware that predatory lenders may steal the registration numbers of registered credit providers, so do check the NCR registrants’ list to verify details. Any irregularities can be reported using the NCR complaint form. You can also telephone the NCR on 0860 627 627 or 011 554 2700.
They don’t conduct a credit check or affordability assessment
Authorised lenders offer loans that follow the guidelines set out by the National Credit Regulator, says Ndimande.
“For example, Sanlam strictly adheres to an internal credit policy that takes into consideration credit as well as affordability assessments to ensure responsible lending practices.”
Predatory lenders will not conduct such an assessment – a warning sign that they are not concerned with responsible lending. They may even ask for upfront payment to secure the loan before granting it, which is something a registered lender would never do.
A reputable lender will explain any fees and interest that will accrue, including a possible loan initiation fee, before you sign an agreement.
Be on the lookout for lenders that attract you by advertising that “blacklisted” clients are welcome, or that no credit checks are required. This is illegal practice – not to mention misleading – and the lenders hope to dupe you into borrowing from them.
They charge unreasonably high interest rates
A 2020 report on reckless lending, conducted by the Black Sash and the London School of Economics and Political Science, revealed that predatory lenders charge excessive interest rates of anything from 50% to 112%, which are impossibly difficult to pay off.
The maximum interest rate on unsecured loans, such as personal loans, is currently 28.75%, so you should not pay a higher rate, Sebothoma says.
He advises borrowers to seek advice from the NCR if they’re uncertain about the interest rate attached to a loan.
Additional warning signs
Predatory lenders may further be identified by one or more of the following behaviours, says Alicia Moses, senior consumer education specialist at the Financial Sector Conduct Authority (FSCA):
- They fail to put a legally-binding contract in place.
- They offer questionable loan arrangements – for example, they may pressure you into taking out a short-term loan and then recommend you take out another loan to pay off the first loan.
- They advertise interest rates that seem too good to be true, for example, 5% a year, but demand an upfront payment before granting you the loan (assuming you actually receive it).
- They ask you to hand over your identity document, bank or SASSA card to secure a loan. This is illegal and should be reported to the South African Police Service.
Options to consider if you struggle to qualify for financing
If you are struggling to qualify for a new loan with a registered credit provider, the following alternatives may prove beneficial:
- Consider a pawnshop loan with an NCR-registered lender. An asset of your choice will be held as collateral until you have repaid the loan.
- Sell an asset to free up funds.
- Consider accessing funds from an existing home loan.
- Look at your budget and consider where you may be able to cut back on expenses, such as unused subscriptions and extravagant luxuries.