Disreputable, or predatory, lenders can trap you in an unsustainable debt cycle. We consider how to identify such lenders and how to access funds without them.
26 August 2024 · Fiona Zerbst
Predatory lending refers to any loan practice that is unfair or abusive to the borrower. This typically occurs when unregistered lenders grant loans to people who don’t qualify for loans from registered credit providers, or who don’t know the difference between reputable and questionable lenders.
We explain how to identify and avoid predatory lenders, and instead access credit from a legitimate provider.
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There’s no direct mention of predatory lending in the National Credit Act (NCA). However, Matthew Thomson, a director of litigation at DML law firm, notes that the NCA does cover predatory lending practices.
These practices include unethical or illegal tactics that unscrupulous lenders use to exploit borrowers, such as charging excessive fees and interest rates, refinancing loans to keep borrowers trapped in a debt cycle, and lending to low-income, elderly, or financially unsophisticated people.
“The NCA guards against predatory lending by regulating overindebtedness and reckless credit,” explains Thomson.
Reckless credit – or reckless lending – occurs when a lender fails to properly assess affordability or doesn’t ensure that the borrower understands the loan’s costs and obligations.
People may take out unsafe loans due to limited access to traditional banking services, low financial literacy, or urgent financial pressures.
If you have limited options in the formal financial market, you may resort to approaching unregistered lenders that market their products aggressively.
However, borrowing when you can’t afford the repayments can trap you in a cycle of unsustainable debt, Thomson cautions.
Don’t sign a loan agreement without understanding the terms and conditions. Before you sign, look out for the following red flags.
Because predatory lenders aren’t registered financial services providers, they operate illegally. This means any contract you sign with them isn’t legally binding.
However, many consumers in South Africa don’t know this – and lenders may threaten, intimidate, or even seize assets, although they have no legal right to do so.
Some lenders may also withhold loan documents, making it challenging to prove unfair lending practices.
Predatory lenders often use misleading advertisements to lure unsuspecting borrowers.
Phrases such as “act now” are used to create a sense of urgency, encouraging you to act without fully understanding the terms and conditions of the loan you are taking.
They often promise loans to consumers who are unable to get credit in the formal sector, but at high interest rates or unfavourable lending terms. They may claim to offer “credit repair” or “debt relief”, but in reality, they will only worsen your financial situation.
These unethical lenders also often promise low monthly payments without being clear about the total cost of the loan.
The 2020 report Challenging Reckless Lending in South Africa by the Black Sash and the London School of Economics and Political Science revealed that predatory lenders charge excessive interest rates ranging from 50% to 112%, often making it impossible for borrowers to pay off their loans.
Didi Sebothoma, stakeholder relations officer at the National Credit Regulator (NCR), advises that the maximum interest rate on unsecured loans, such as personal loans, is currently 28.75%, so you should not accept a loan at a higher rate.
It’s illegal to charge upfront fees before granting a loan, and legitimate lenders will never do this.
However, unregistered lenders often get away with this practice because consumers are unaware of their rights. If you’re charged upfront fees, report it to the NCR or the Financial Sector Conduct Authority (FSCA).
Unregistered lenders charge upfront fees to make money even if they don’t provide a loan, and use the fees to offset the risk of lending to high-risk borrowers.
If you’re heavily indebted, unethical lenders may try to sell you a new loan to consolidate your debt or lower your monthly payments.
The promise of immediate relief may persuade you to take out a new loan without considering the long-term costs.
Unfortunately, this will likely trap you in a debt cycle, because the new loan comes with worse terms, making it harder to repay. When debt is refinanced in this way, new fees are charged, you pay more interest, and the debt is extended.
Eventually, the lender may try to seize your assets.
If a lender tries to persuade you to take out a new loan to service your existing debt, contact the NCR or FSCA, or contact a registered debt counsellor, who may be able to assist if you’re overindebted.
A predatory lender may hold your documents “hostage” until you pay, and could even threaten to expose or sell your sensitive information. Such lenders may also use your personal documents to locate you if you default on loan repayments.
These actions are illegal and unethical, and they’re among the tactics that predatory lenders may use to trap you in a debt cycle.
Legitimate lenders are within their rights to ask for some form of identification, but they’re not entitled to take possession of your original documents.
Borrowing from a predatory lender can saddle you with excessive debt. In addition, it can put your credit score, financial reputation, and financial future at risk.
Watch out for the following warning signs:
The most obvious difference between authorised and unauthorised lenders is that the former are registered with the NCR.
“In terms of section 40 of the National Credit Act, any person or entity that provides loans or extends credit with interest must register as a credit provider,” notes Thomson.
“A credit lender must go through a registration process to comply with the NCA, and provide annual proof of compliance and reports to the NCR.”
Thomson says lenders who fail to comply risk having their registration cancelled. They will also incur penalties and may be charged with an offence.
Sebothoma notes that registered lenders must display their NCR registration certificates and window decals.
If a lender’s certificate is not displayed, you’re entitled to ask to see it. The certificate must contain a registration number that can be verified with the NCR.
Be aware that predatory lenders may steal registered credit providers’ registration numbers, so check the NCR registrants list to verify the details.
You can report irregularities using the NCR complaints process. You can also call the NCR on 0860 627 627 or 011 554 2700.
If you’ve been a victim of predatory lending, there are several steps you can take:
Authorised lenders follow the guidelines set by the NCR. In addition, says Ayanda Ndimande, head of business development at Sanlam Retail Credit, reputable lenders also adhere to internal credit policies, including conducting affordability assessments.
Predatory lenders won’t conduct such assessments because they don’t want to draw attention to themselves and are more concerned with generating profit than ensuring you can comfortably repay your loan.
They prefer to extend large loans that you may struggle to repay, as this ensures higher fees and interest. If you remain in debt and your loans are refinanced, the debt stays in the system and continues to enrich the lender.
Even worse, untrustworthy lenders may attempt to attach your assets for further financial gain.
Always ask a lender about the affordability assessment process, and be wary if they aren’t interested in your income, expenses, and financial conduct.
It pays to carry out your own affordability calculation before taking out a loan:
Unregistered lenders operate outside the law, so they’re not bound by the limits imposed by the National Credit Act.
Because they lend to high-risk borrowers who usually have poor credit scores, they increase interest rates to minimise the risk to their business. They also target desperate people who are willing to sign agreements even though they’re being exploited.
Be aware that some unregistered lenders advertise low interest rates that apply for a limited period and then inflate them, trapping borrowers in a debt cycle.
Contact the NCR if you have questions about the interest rate attached to a loan.
Alicia Moses, senior consumer education specialist at the FSCA, warns that the following behaviours by lenders should set the alarm bells ringing:
If you’re struggling to qualify for a new loan from a registered credit provider, consider the following alternatives:
Most people have debt, but it’s a red flag when it becomes unmanageable.
If you think you may be overindebted – that is, unable to service your existing debts – consider contacting a debt counsellor to advise you about your options.
To ensure you don’t fall victim to predatory lenders, improve your financial literacy, do thorough research before taking out a loan, and carefully read the terms and conditions before signing a loan contract.
Tip: Check your credit score to find out if you qualify for a loan through a reputable lender.
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