Improved consumer awareness key to avoiding debt trap

Kevin Hurwitz, CEO of Wonga.com South Africa

The Credit Bureau Monitor (CBM) statistics for the quarter ending June 2013 released by the National Credit Regulator (NCR) revealed that the number of credit active consumers with impaired records in South Africa increased by 161 000 from 9.53 million to 9.69 million quarter-on-quarter.

While Kevin Hurwitz, CEO of Wonga.com South Africa acknowledges that most of the unscrupulous lenders are not registered with the NCR, and so avoid regulation, there are also steps that potential borrowers can take to avoid falling into the debt trap.

Hurwitz has the following advice for South Africans who are considering taking out a loan:

1. Use a registered and reputable lender

South Africans applying for a loan should only make use of the services of a reputable lender who is registered with the National Credit Regulator (NCR).

Reputable lenders act as a safety catch for those consumers who are not self-regulating with regards to their financial affairs. This is thanks to stringent credit assessment processes followed by reputable lenders which help to determine whether the prospective borrower can afford to repay the loan before it is granted.

And while it may be easier to secure a loan from a disreputable lender, especially if the consumer has a bad credit record, the lender is then free to charge whatever fees it likes, or to hold onto personal items belonging to the borrower such as an ID document or ATM card - neither of which is allowed under the NCA.

2. Understand the terms and conditions of the loan

Unfortunately, in their eagerness to secure a loan, many borrowers do not take the time to fully understand the accompanying terms and conditions. In this regard, there are two key elements borrowers need to understand: when the loan must be repaid and; the consequences of failing to repay the loan by the agreed date. In addition, credit life insurance is often added to the charges, which consumers may not even be aware of before they agree to the terms.

In most cases, loans will continue to incur service fees and interest until the full amount is repaid. Consumers must make sure they are fully aware of these potential additional costs before agreeing to take the loan. What's more, if consumers default on loans taken, the credit bureau will reflect this on their individual credit records and it may affect their chances of being granted a loan in the future.

3. Consumers must ensure they can afford to repay the loan - before they take it

Before taking a loan, it is imperative that consumers calculate exactly how much they can afford to borrow so that they can repay the entire loan (including fees and interest) within the agreed period.

A common mistake people make when assessing their ability to repay a loan is failing to take into account the additional cost of interest and fees charged. This is why it is important to deal with a reputable lender that is transparent and upfront about the fees and interest charged.

For those consumers who find themselves in a situation where they need a small short-term loan, by following the above mentioned advice they can better ensure they do not put themselves under further financial strain.