South Africans are being urged to avoid taking out short-term loans without a full understanding of how microlending works. A short-term loan is generally for a small amount of money, usually repayable within one to three months, and with very high interest rates attached.
This kind of loan should only be considered in an emergency, suggests Karin Augustyn, a registered debt counsellor with Debt Hero. "For example, when you need access to a relatively small amount of cash at short notice; and only if you are certain that you will be able to repay it within the timeframe agreed with the lender. This is very important, because you'll be creating debt to settle debt."
Augustyn expressed concern about the number of South Africans who are overindebted, with reports suggesting that of 19-million credit active consumers in South Africa in 2016, more than half had impaired credit records, with debts three months plus in arrears. Debt Rescue further identified personal loans as the top area where outstanding debt is most prevalent in the country.
The debt counsellor is also of the opinion that short-term loans must never be used for day-to-day living expenses such as groceries or transport. "If you think about it, your expenses generally remain the same month-to-month. So if you need finance for this month's groceries, next month you have to repay the loan and find the money for grocery shopping."
Low levels of financial literacy further compound the situation, says Sonja Visser, CEO of African Unity Life (AUL). She says a great number of consumers do not understand the basics of how different forms of credit work, and invariably do not know what they are signing up for.
Augustyn has five recommendations to ensure that you undertake a short-term loan only with a credible and trustworthy lender.
How to choose a short-term lender
1. Always check if the creditor is registered with the National Credit Regulator Credit Provider (NCRCP) – visit their website to check, if in doubt.
2. Never hand over your ID, debit card, South African Social Security Agency (SASSA) card – or any other items of importance – as security to the lender. A short-term loan is unsecured, which means that no policies or any other assets are handed over to the lender as security – as would be the case if it were a vehicle or home loan.
3. Visit the lender's office, ask questions and ensure that you are given five days during which to accept the loan — this is your right. Avoid internet loans, especially if you are asked to disclose personal information – because this is often made available to third parties
4. Read the contract, and if anything is unclear ask questions to make sure you understand the repayment conditions. A third eye may also help in this.
5. "Ts & Cs" is not a casual acronym. It stands for "Terms and Conditions" and holds legal power, which means that when you sign, you agree to abide by those terms and conditions.