Protecting Consumers Against Reckless Lending

Financial Fitness: The National Credit Act

By Jessie Taylor

The National Credit Act aims to reduce reckless creditor behaviour and protect consumers. Before the National Credit Act, consumers were often given credit without the proper checks being carried out. This led to consumers becoming over-indebted. There were limits on who could access credit, with low earners often exploited by unlicensed lenders.

However, this activity - along with the operation of illegal lenders – has vastly reduced since the National Credit Act became fully operational.

Access To Fair Consumer Credit

The National Credit Act was introduced to give South Africans access to fair and non-discriminatory consumer credit, and it also aims to provide improved consumer information standards and regulate the lending process. The legislation outlaws certain practices of loan canvassing and controls marketing practices and advertisements, such as automatic credit limit increases. The National Credit Act provides every person’s right to apply for credit while ensuring that consumers are given adequate information about loans and that unfair credit practices are prevented.

In addition, the National Credit Act states that consumers must receive a detailed written quote, which is valid for five business days, to enable quote comparisons from different credit providers. These contracts supplied by credit providers must be easy to understand, in two official languages and the Consumer must receive a free copy. Among the National Credit Act requirements is that credit providers must do due diligence to ensure the Consumer can afford the loan. All loans must be recorded on a register to prevent consumers from becoming over-indebted.

Should a credit provider fail to do so or contravene any of the other provisions in the National Credit Act, they may be found guilty of reckless lending. They may be subject to severe penalties and may even forfeit their right to recover the debt if they are found guilty of reckless lending. However, Consumers who fail to fill in the loan application fully and honestly are not protected by the National Credit Act.

Protecting Against Unscrupulous Lenders

According to the National Credit Act, only registered credit providers are allowed to charge interest. The legislation effectively caps the interest rates, fees, and other charges that credit providers may charge, depending on the type of credit and when the credit was granted. The maximum interest rate is usually calculated off a formula depending on the SA Reserve Bank Repurchase (Repo) rate at the time that the credit was granted.

For example, registered short term lenders may have a maximum interest rate of 5%, and the total cost of a typical R1000 loan is capped at R1150. This can be significantly higher among illegal lenders who can charge up to 50% in interest rates. The National Credit Act has helped to counteract the threat of informal lending, but estimates say there may be as many as 40 000 illegal lenders still operating in South Africa. This clause aims to protect consumers from unscrupulous lenders who may charge excessive interest, but it also has implications for consumers should they decide to lend money to family or friends.

You, as an individual and not a registered credit provider, may not expect any form of repayment or interest on the money you lend. In other words, if you lend money to a family member or friend, you may not charge them interest on the loan. And if you do charge interest, you could be prosecuted under the National Credit Act and will face legal implications. The National Credit Act also limits the maximum amount a credit provider can charge for initiation fees, monthly service, and default and collection costs.

In addition, the National Credit Act gives consumers the right to apply for financial management and debt counselling assistance if they are unable to pay their debts. This process must be managed by a registered Debt Counsellor and will allow over-indebted consumers to restructure their debt repayments.

South Africa's Household Debt In Numbers:

• South Africans are using 65% of their net income to service debt

• The cost of servicing household debt as a percentage of nominal disposable income climbed from 7.5% in the third quarter of 2022 to 8.1% in the fourth.

• In the fourth quarter of 2022, there were more than 800 000 new entrants into the credit market

• The total credit active population is 18.7 million

• This population owes more than R2.3-trillion