Why loans without affordability checks should be avoided
Overview
With more people needing access to extra cash nowadays, it’s no surprise that there are more illegitimate lending institutions. It’s important for borrowers to know their affordability & rights in terms of credit agreements.
In South Africa, the National Credit Act protects consumers and credit providers. One way the Act does this is by regulating credit agreements.
According to the Act, credit providers cannot give loans to borrowers without affordability checks.
Lending money without conducting affordability checks is known as reckless lending. By law, a creditor must take steps to ensure that you can afford to pay the loan back.
Why loans without affordability checks should be avoided:
If you are unable to afford to repay the loan, you shouldn’t be applying. By granting you a loan without assessing your affordability, a creditor runs the risk of making you over-indebted. They also run the risk of not being able to recoup costs associated with granting you the loan.
As a borrower, you must be asked questions about your income and your regular household expenses.
Of South Africa’s 22.5 million credit-active consumers, just under half of them have impaired credit reports. Credit-providers in South Africa are now required by law, to properly test affordability, as a measure to avoid adding to these figures.
Credit providers need to avoid providing loans without affordability checks by asking if the applicant can really afford credit. Lenders must do robust affordability tests.
What creditors must do before granting access to credit:
- Check your latest 3 bank statements
- Calculate your existing financial obligations according to your gross monthly income
You should also keep in mind that being refused credit can be a sign that you may need to get debt advice. Before applying for credit, you should assess your affordability.
