Why are millions of South Africans defaulting on their credit agreements?

More and more South Africans are defaulting on their credit agreements and the reasons behind this are far more complex than insufficient income to cover debt.

There are currently more than 4 million South Africans who have defaulted on one or more of their credit agreements and more than 40% of credit active consumers who have a poor credit score as a result.

Credit scores in South Africa

• Poor credit score: 0 - 582
• Average or fair credit score: 583 - 680
• Good or excellent credit score: 720 - 999

What’s the real issue causing South Africans to default on their credit agreements?

From 2018 to date inflation has taken the country by storm with food and fuel prices skyrocketing to level never before seen.

With the cost of living having increased so drastically and suddenly many poor and middle-class families sought to take out personal loans to cover their immediate living expenses.

Why are these people being awarded credit when they can’t afford it?

According to the National Credit Act all Financial Services providers are required to conduct an affordability assessment on their customers before granting them credit.

The metrics used to conduct this affordability assessment are found in a table form in the Act but, sadly, this assessment does not take all of a consumer’s expenses into account and also tends to overestimate income.

Why high-interest, short-term loans are the real danger

Taking out a small loan with the bank or any credit provider does not strike many South Africans as a serious matter and the shorter repayment periods and interest charged also seem to be no cause for alarm.

The problem then arises when consumers find themselves unable to come up with the money to make their repayment at the end of the month. They then decide to take out a second loan to cover this initial short-term loan repayment and thereafter enter into a cycle of debt that is unbelievable difficult to get out of.

Once a consumer has taken out multiple high-interest short-term loans, one to cover the one before it, sooner or later the house of cards will come tumbling down and the consumer will default on one or more of their credit agreements.

Taking on debt to repay existing debt is a financial disaster waiting to happen

Borrowing money to repay other debt is one of the most dangerous and ineffective ways to deal with a cash shortage. Whether it’s a small sum of money or a large personal loan, taking on more debt to repay existing debt will cause financial devastation in your life sooner or later. So what should one do if their simply find themselves unable to pay?

What to do if you can’t afford the repayments on your credit agreements

There are a range of options for South Africans that find themselves unable to meet their credit repayments on time and one of the very first things that they need to do is contact their credit providers.

Contact your credit providers and discuss your situation with them

If you are having a particularly difficult month but you expect that you’ll be back on your feet by the end of the month, contact your credit provider and tell them why you cannot make your repayment this month or, alternatively offer to make a smaller repayment.

Credit providers will be willing to work with you to ensure that you do not default on your credit agreement and will sometimes even be willing to completely restructure a loan agreement to make it affordable for you.

Debt counselling options in South Africa

Debt counselling services are becoming more and more popular among South Africans as it’s one of the most efficient ways to deal with a bad debt problem.

If you have found yourself struggling to meet your monthly commitments and can no longer deal with the calls from your creditors and multiple overdue payments, debt counseling may just be the answer.

Introduced by the National Credit Act in 2007, debt counseling is a process that will help you restructure your debts by requesting alternative repayments from creditors and helping you budget.

Once you apply for debt counselling services creditors may no longer take legal action against you and can no longer contact you.

They will have to communicate with you via your debt counselor and you will make one payment to your debt counselor which will then be used by a Payment Distribution Agency to repay all of your creditors.

During the process of debt counseling you may not take out any new credit and once you’ve repaid all of your debt you will be issued with a clearance certificate.

Summary of options for those who cannot afford their loan repayments

• Contact your creditors and inform them of your situation
• Cutting down expenses and increasing income
• Debt counselling services
• Debt review
• Filing for bankruptcy

Always ensure you can afford to take on new debt before applying for a loan

When you apply for a new loan and see that your monthly repayment will be relatively low it may be difficult to say no. The problem is not one of your loans on its own but the combination of multiple credit agreements, store accounts, bills and expenses that add to a pretty sum and can have even some of the highest earning professionals in the country finding themselves in a financial rut.

Can I really afford this loan?

Since you know our finances better than anyone the solution is to always be honest with yourself about how much you’re spending and how much money you have left after paying all of your commitments. If you’re trying to take out a loan to ease the financial pressure, be sure that you will end up in an even more difficult situation later on.

You should always be able to work in the new repayments on a loan into your budget and have more than enough money left after repaying your commitments not only for your living expenses but also for any unexpected situation or emergency that may arise.

The long term effects of defaulting on credit agreements

Since South Africans are taking on loans to ease the financial strain the economy is placing on them and lenders are not doing enough to ensure affordability more and more consumers will continue to default on their credit agreements and destroy their credit ratings.

Although this may not seem to cause significant harm to them right away, in time when they seek to open a business, buy a home or apply for seemingly insignificant services like a mobile phone contract and they find themselves unable to do so, the regret and frustration will catch up with them.