What is the attraction of unsecured loans?

    Why are unsecured loans so popular in South Africa? A few years back, this type of loan was not well known. Why now?

    Tough economic times drive cash-strapped people to quick cash solutions. And no security needed to obtain an unsecured loan.

    Some points to note:

    • Beware of loan sharks
    • The lending company must have NCR clearance
    • The National Credit Act affords consumer protection
    • You must meet certain criteria for an unsecured loan

     

    Unsecured loans Spell big business

    Back in 2008, the total value of this type of loan amounted to R30.8 billion. By the end of March 2016, the value of unsecured loans totalled R165 billion.

    Currently, banks and credit providers offer unsecured loans up to a maximum of R230 000, repayable over seven years.

    Some issues To consider when Applying for an Unsecured Loan

    An unsecured loan is a personal loan because you provide no financial security to get the cash. Many people often overlook the high rate of interest to repay in exchange for cash in hand.

    The ease of getting quick cash creates a few problems. It encourages shady business practices by many small micro-lenders and it acts as a cause for debt growth.

    South Africa is a nation in debt. Banks hold about 84% of all unsecured loan contracts according to the National Credit Regulator (NCR).

    The plus Side of Unsecured loans

    The advantage of this type of loan is that you do not have to cede policies or put your home on the line to get cash. In other words, they don’t need any assets to access cash funds.

    This is why interest rates applied to the loans are higher than on a normal loan where you provide security.

    Beware of loan Sharks with Unsecured loans  

    Unsecured loans  Before applying for a loan, you should ensure that the lender works within the framework of the National Credit Act (NCA) and registered with the NCR.

    This gets around the danger of borrowing cash from a loan shark, Their shady business ethics have seen thousands of people, sadly the uneducated, taken for a ride in terms of interest rate charges.

    Despite Government clamp-downs, there are still many of them working under the radar. Banks, on the other hand, have to abide by the new interest rates and must apply the current repo rate of 6.75% PLUS 21%.

    In the past, banks were charging up to 32.65% and the cutback in interest charges has seen a downward spiral in their lending rate. This, in turn, has led many people down the loan shark path. If you are unsure about the status of a lending company, contact the NCR BEFORE signing a contract with them.

    What is the NCA?

    Launched in 2007 The National Credit Act is a regulator for the credit lending industry. The Act was recently amended to close loopholes and provide better protection for consumers.

    One of the major changes to the NCA was capping interest rates that applied to the various loans available on the South African market. This became effective in May 2016.

    Revised capped interest rates are:

    • Unsecured credit (Personal loans etc): Repo rate + 21% per annum = 27.75%
    • Mortgage agreements (Home loans): Repo rate + 12% per annum = 18.75%
    • Credit facilities (Credit cards and store cards): Repo rate + 14% per annum = 20.75%
    • Developmental credit: Repo rate + 27% per annum = 33.75%
    • Incidental credits: Example, if you are late paying your chemist bill, you can be charged interest at 2% per month
    • Other credit agreements: Repo rate + 17% per annum = 23.75%
    • Short-term transactions: 5% monthly on the first loan and 3% monthly on any subsequent loans within one calendar year

    The maximum service fee that may be applied to credit agreements has increased from R50 to R60 monthly (excluding VAT)

     A list of Initiation fees on –

    •  Home loans: R1 100 plus 10% of an amount in excess of R10 000, capped at R5 250 maximum
    • Credit and store cards, short-term credit transactions and personal loans: R165 plus 10% of an amount in excess of R1 000, capped at R1 050
    • Development credit for small businesses: R275 plus 10% of an amount in excess of R1 000, capped at R2 600
    • Credit development for low-income housing: R550 plus 10% on an amount in excess of R1 000, capped at R2 600

    *The repo rate is the interest rate at which the Reserve Bank lends money to banks

    Qualification criteria For an Unsecured loan

    Borrowers now have to supply credit providers with one of the following:

    • Payslips for the last three months
    • Three months bank statements reflecting salary deposits
    • Current financial statements
    • Documented proof of income

     

    In turn, the lending company will:

    • Work out gross income
    • Define the lender’s minimum living expenses
    • Consider all debt obligations
    • Decide on an income amount (the amount available to repay the loan must be less than the new loan repayment amount)

    Because of the new rules, industry leaders fear consumers who fail to meet the criteria will seek cash from loan sharks.

    Overview

    South Africa has a consumer-driven economy and access to credit is important. This is very true today as the cost of living goes up every month. Thus, consumers are under pressure to keep their heads above water.

    Everyone faces financial issues like needing a new set of tyres or having to pay for medical expenses. It’s at times like this that an unsecured loan may be the only solution. One in five South Africans who are credit-active is in arrears with their debt repayments.

    This situation, however, is easily avoided with careful financial planning. For that reason, you should be allowed access to unsecured loans PROVIDED they live within their financial means.