Sometimes, not borrowing is better than borrowing, but there are times when you don’t have a choice and you need to get a loan.
Following the demise of African Bank (“Abil”), one of South Africa’s biggest lenders of unsecured loans, many an expert has commented on and warned about the practice of unsecured lending and its impact on the South African economy.
Despite concerns about escalating consumer spending, the South African Reserve Bank has decided to keep interest rates on hold and not increase it - for now. While this is good news for borrowers, it carries with it an implicit word of caution for credit-hungry South African consumers that the ‘interest holiday’ is over.
Build up a GREAT credit record.
Here, it is important to note that, in order to build up a good credit record, you would probably have to borrow some money at some stage, and repay it sustainably and diligently as agreed.
If you have done this, it is likely to stand you in good stead when you want to borrow a little more than usual, for example if you want to finance a car or to pay for your own tertiary education studies.
So, when confronted with a financial challenge and you need to get a loan, doing your homework upfront is not only wise, but a critical step in the process. It follows from this that you should afford yourself time to explore various options such as the interest rates offered, repayment premiums and periods as well as the lender itself, and not make any impulsive decisions about borrowing money that you will regret later.
Similar to Modest Money's post on things to look out for when taking a cash loan, below are general guidelines on how to avoid making common mistakes that many consumers make when borrowing money, in so doing harming themselves and in some cases also their credit record and profile.
Being ‘blacklisted’ is a very unpleasant experience and a ‘blemish’ on your name that follows you wherever you go. Against this background, a critical first step when dealing with financial matters is to seek the advice of your (or a) qualified personal financial advisor or consultant. They are usually well equipped to advise you on potential pitfalls and how to avoid them when making financial decisions, also if you have to or want to borrow money. There are many more that those that we have listed below, but if you successfully avoid making these mistakes, you will be empowered to negotiate and recognise other financial challenges when they come your way.
When referring to the concept of borrowing money in this article, please note that the focus is on personal loans from a bank or other financial institution, including a micro lender, for a specific purpose. We will not discuss overdrafts, retail store cards and credit card debt, even though these are deemed to form part of unsecured lending.
Mistake #1 – The wrong strategy & attitude
The saying that ‘if it’s too good to be true, it probably is’, definitely applies to borrowing money, and therefore it is important that you set out with the correct attitude and strategy in mind – it should not be about finding the best (cheapest) repayment premium over the longest period of time, the quickest turnaround time in approving a substantial loan and/or easy access to a substantial amount of money without any obligation on your part to provide some form of security.
Remember that borrowing money is risky – both for you & the lender.
If you have criteria such as those above in your strategy, you are likely to increase the risk on both sides (and incur the cost for it!). Remember that, when borrowing money, you are highly unlikely to find your proverbial bread buttered on both sides, as you will most likely have to sacrifice something for a better outcome (for you). An example of this is that you might have to opt for higher monthly repayment premiums over a shorter period of time, to reap the benefit of a lower interest rate.
As you are less likely to default on your payment if it has to be repaid over a shorter period, the lender can charge you lower interest rates because you don’t constitute a high risk (of the financial institution not getting their money back).
Mistake #2 – Not researching the financial institution
While banks are the primary providers of credit in South Africa, they are by no means the only ones that you can borrow money from. However, not all providers of credit are created equal. For this reason, when you research the various financial institutions you can borrow from, carefully consider all factors before making a final choice on which financial institution to borrow from. At this stage, it is important to note that generally, South African banks are in the business of providing secured loans, meaning you have to put down some collateral that can protect them and you in the event of you defaulting on your loan repayments. Not many banks still offer unsecured loans, but there are other financial institutions that continue to offer these types of loans.
If you already have a bank account, you are managing your finances well and have a good credit record at your bank it is a good choice to start here. With your risk profile on record, they can immediately tell you how much money you ‘qualify’ to borrow, as well as the terms and conditions around repayment and security required (or not, for example in the case of you having a mortgage loan or bond with them).
Mistake #3 – Not enquiring about FSB registration
Regulation of the financial services industry in South Africa has been our saving grace through a few financial crises already. It is important to note that all financial institutions that offer financial products and advice to South African customers have to be licensed by the Financial Services Board (FSB). Their FSB license number must be displayed prominently on all marketing material and messages, stating that it is ‘a registered financial services [and credit] provider’.
If and when an institution offers you financial advice or any financial product and they don’t display their FSB number prominently, you have every right to be suspicious and request their FSB license number.
Mistake #4 – Not being honest about affordability
No matter which financial institution you choose, you will have to complete an application form, often online, detailing your monthly expenses. The main purpose of this is to determine whether you can ‘fit in’ one more monthly payment premium on your budget of monthly financial commitments, thereby checking that you will not be overcommitting yourself if you add another expense.
It is critical that, when you complete this application form, that you record all your monthly expenses accurately and honestly. Leaving out an expense in an effort to obtain the loan might get you the loan, but in the process of ‘second-guessing’ the criteria that the financial institutions apply in approving or rejecting loans you might be over-committing yourself. Should you end up defaulting on the repayments because of a non-disclosure, it will impact negatively on your credit record and profile.
You should at all times know exactly what your monthly expenses are; it should be captured as fixed and variable costs on a simple spread sheet. Keeping record in this way, especially keeping track your variable cost spend and adjusting all as they increase annually, will ensure you are informed of what all your expenses are.
When the time comes and you need to borrow money, completing the application form honestly and transparently will be easy.
Mistake #5 – Falling for ‘marketing speak’
Many financial institutions are very clever at marketing their products to unsuspecting customers. Here too, research and even just following the highlights in the daily (financial) news may protect you from falling for these institutions’ marketing speak. Typical of such marketing speak is to offer to make it easier for you by offering you a low repayment premium, but spread over a maximum number of months, sometimes as long as 84 months.
They are quick to point out that this is a ‘special offer’ to ‘thank’ their loyal customers who have built up a good payment record with them.
If you are concerned that you might be caught unawares and not be able to think on your feet when confronted with such an offer, you can choose to opt out of any marketing messages from such a provider of microfinance being sent to you. In the case of them calling you for the first time, request them to make a note on your system profile that you are not interested in receiving marketing messages or calls from them.
Mistake #6 – Not reading the Terms & Conditions
Before the Marikana tragedy in 2012, few South Africans knew much about garnishee orders and its abuse. After Marikana, many South Africans became aware of how credit providers can abuse garnishee orders to enforce repayment of outstanding loans. What sounded the alarm bells about garnishee orders is the fact that many credit providers use these illegally and without the knowledge of the borrowers, drastically affecting their net income.
A garnishee order means that an employer has to deduct an amount (this amount is arrived at through a legal process) from employees’ salaries and pay it directly to the credit provider. In the case of an employee not knowing about this, he is caught unawares when confronted with a significant decrease in his take-home-pay.
From the above it is clear that familiarising yourself with the Terms and Conditions (the T’s and C’s) of a loan agreement is critical. While it might be too much to expect a consumer to carefully study and remember all the fine print of such an agreement, it is important to familiarise yourself with the salient features of the agreement. If at any time you are uncertain about what you are letting yourself in for, ask as many questions as come to mind and that you need answers to before signing a loan agreement.
Don’t let any credit provider pressure you into signing any agreement that you are not comfortable with and that you would like a second opinion on.
Ask for time to discuss the content of the agreement with someone you trust and sign only if and when you are satisfied that your rights as a consumer will not be prejudiced.
In closing, it is important to note that only persons who work and live in South Africa are eligible for personal loans, while those who are married in community of property are not allowed to enter into any credit agreement (including a personal loan) without the spouse’s permission.
It will be some time before the South African economy will be out of the woods.
As the battle for daily survival increases in the face of increasingly adverse economic conditions and inflation that is growing faster than real wage increases, consumers’ demand for credit increases. However, responsible financial institutions are cognisant of the fact that in adverse economic conditions, credit-worthy consumers are few...
To borrow or not to borrow (money) – that is indeed the question. If you don’t have a choice and you have to borrow money, do your research, have the right attitude, be honest with yourself and the financial institution that you are applying to and make sure you familiarise yourself with the fine print in the Terms and Conditions of the loan agreement that could adversely affect you, your net income or your credit profile.
While they offer you quick access to money, low repayment premiums and that over an extended period of time, you will pay dearly in interest rates, which could climb up to 20% and higher!
Rather opt out than expose yourself and making a decision that you will live to regret.
Take your time to research, but make sure to also afford a credible and reliable financial institution the time they need for a thorough approval and vetting process before giving you the honest answer you deserve.