The Hidden Danger Threatening The South African Rand

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Often referred to as upselling, consumers are advised that a longer repayment term of up to 84 months on an original loan application for 60 months will be preferable in helping a borrower meet affordability assessments and keep up with the repayments.

However, as the lender’s risk falls, the borrowers’ increases, furthering the amount of time they will be repaying unsecured debt and increasing the amount they are paying in interest – even if it appears, superficially, to be cheaper.

Why Are Extended Loan Terms Problematic?

The primary issue with extended repayments is that a consumer is often left repaying a debt for years – and significantly longer than they may have reasonably been able to repay the original amount of borrowing. The total costs are inevitably higher, even if a smaller monthly repayment seems appealing.

As an indication, let’s consider a customer applying for a loan of R20,000 who has been quoted an interest rate of 16.25%:

- Over six months, the monthly repayment would be R3,909 with a total repayment value of R23,457 – or R3,456 in interest charges.

- Extending that loan term to three years would reduce the monthly repayment to R904, but overall, the same borrower would repay R32,544 in total – or R12,544 in interest.

- A longer repayment period of six years would bring the monthly repayment value down to R614 but equally boost the total repayable to R44,205 – paying the lender back more than double the amount they originally borrowed.

While the US introduced more robust ‘fair lending rules' in a series of reforms to the Community Reinvestment Act just this week, the South African lending regulations have not kept pace.

Although reforms over recent years have provided some safeguards, such as caps on the interest rates lenders can charge, they have yet to remove the risks of long-term loan repayment terms effectively.

How a Volatile Economy is Pushing More South Africans Into Longer Term Debt

Part of the problem is that the ongoing economic difficulties have made it hard for many families to cope with daily life, including mortgage or rent payments, utilities, travel and groceries. At a time when borrowers are more vulnerable, they are, of course, more agreeable to a longer loan term to access the capital needed now without fully understanding the long-term ramifications over many years.

Brett Van Aswegen, CEO of a leading South African short-term credit lender, confirms that shorter-term periods for lower-value loans are almost always in the consumer’s best interests, ensuring they aren’t repaying credit borrowing for a two-week holiday for the next six years or potentially longer.

Van Aswegen notes that rising interest rates, the skyrocketing cost of living and a weak Rand are forcing struggling South Africans into a dangerous position:

"There is an increasing trend for [personal loan] lenders to increase the maximum loan term they offer to negate the effect of lower consumer affordability.

"This means if borrowers apply for a loan over 60 months because they cannot afford the repayments, the lender instead pushes them towards repayment terms over 72 or even 84 months in some cases.
 
"This places borrowers at great risk and threatens overall stability of the credit ecosystem, as gauging risk over the long term in a volatile employment market such as that of SA is complex."

Education and information are key. Borrowers utilising credit for essential everyday outgoings should have a clear idea about whether their debt is manageable and whether they will be able to cope without further credit for the duration of the repayment period.

According to CEIC Data, the problem is getting worse rather than better.

In June 2023, household debt was equivalent to 40.9% of the national GDP, having increased from 40.7% the quarter before – indicating that longer loan terms and increased reliance on credit borrowing aren't going away soon.