Michael Buxmann (PGDFP), a financial planner at Nedbank Wealth, responds:
Reckless lending applies to any individual who is experiencing financial trouble due to the practice of negligent lending from credit providers.
Let’s start of by looking at the law: The development of reckless lending can be identified by looking at three minimum requirements that credit providers need to adhere to before entering into a credit agreement with a consumer.
Firstly, the law states in the National Credit Act: “Prior to entering into a credit agreement with a consumer, the credit provider must conduct a detailed financial assessment on behalf of the client. Should the credit provider fail to conduct such assessment, any credit agreement entered into between the credit provider and the consumer is classified as reckless lending or reckless credit irrespective of what the outcome of the assessment might have been.”
A detailed financial assessment on the consumer’s monetary affairs is nothing else than an analysis of the consumer’s monthly income, expenses and obligation towards existing debt. The process will provide the credit provider with an up to date snapshot of the consumer’s disposable income and cater as a sustainability and affordability test.
It’s ultimately impossible for a credit provider to do sustainable business without examining whether a client will be able to service the monthly repayments (capital plus interest) over the term of the loan.
Secondly, the law states: “Should the credit provider conduct an assessment and conclude that the consumer does not understand the risk, cost and obligation created by the proposed credit agreement, but still enters into the credit agreement with the consumer, such credit agreement is classified as reckless lending or reckless credit.”
Each individual’s knowledge on financial products and services differ, it is therefore necessary that the product provider determines if the consumer understands the risk of taking on additional debt, consequently having less money available to support his/her lifestyle.
What’s the true cost of the credit agreement? These can consist of an initial fee, monthly service fee plus the interest and capital settlement in the form of monthly repayments (obligation).
Loan Amount: R250 000.00
Loan Term: 84 months
Interest Rate: 22.40%
Monthly Service Fee: R68.00
Initiation Fee: R1 197.00
Total Repayment: R505 270.00
(The above calculation is only for illustration purposes.)
Lastly, the law states: “Should the credit provider conduct an assessment and conclude that entering into the proposed credit agreement would cause the potential consumer to become over-indebted, but still enters into the credit agreement with the consumer, such credit agreement is classified as a reckless lending practice.
In conclusion, if a consumer cannot sustain his/her normal lifestyle after the monthly repayment of the credit agreement he/she will suffer a shortfall and become over-indebted.
Understanding the functioning of debt as well as the costs thereof on your current lifestyle is one of the most important things to think through before you enter into a credit agreement with a credit provider.
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