The interest rate cut earlier this year hasn’t done much to reduce the over-indebtedness of South Africans, thanks to sharp rises in the cost of electricity, fuel and food – and the fact that, generally, the over-indebted didn’t use the saving to reduce their debt burden.
This emerged at an over-indebtedness summit hosted by the National Debt Mediation Association and the Credit Ombud in Midrand last week.
Professor Bernadine de Clerq of Unisa’s Personal Finance Research Unit said her team’s second-quarter research revealed that South Africans were back to the indebtedness levels of the 2009 recession.
“And the situation has worsened dramatically in the last quarter,” she said.
“Many have since gone from what we term mildly exposed to very exposed.”
National Credit Regulator (NCR) figures released this month back that up – the number of consumers regarded as being in good standing fell by 60 000 to 10.38 million.
Put another way, almost half the country’s 19.6 million credit-active consumers were not in good standing at the end of June.
That means they had either missed more than a couple of instalments, had a judgment against them, or had been handed over to debt collectors.
And that figure has no doubt worsened since June.
Plus, that’s not the whole story – the NCR data only focuses on credit agreements. Debts not reflected in those numbers are municipal, medical, clothing and cellphone debts and tuition fees.
“It’s not income vulnerability which causes the problem,” De Clerq said, “it starts with expenditure… people can’t afford things now because they overspent on their car or their house, and now they can’t meet their repayments.”
In other words, they’re living beyond their means; failing to fund a lifestyle they simply can’t afford.
On the other hand, taking the entire population into account, most South Africans don’t have access to formal credit and borrow from moneylenders or family to meet basic needs. This is according to Dr Sabine Strassburg of the Finmark Trust, which surveyed almost 4 000 South Africans earlier this year.
Their top reason for borrowing money was to buy food.
Dr Penny Hawkins of the economic policy and research company Feasibility said the poor were forced to pay by far the highest interest rates, too.
Looking at the forms of credit in the marketplace, Hawkins said the number of home loans had dropped since 2002, but the “big winner” was the huge surge in the number of credit and store cards in the 10 years, across the board.
“It’s very unusual to find a South African who does not have store credit,” she said.
I found Hawkins’s presentation revealing in two respects:
She said instalment sales – think furniture – had been fairly static in recent years. “They are making their money from add-ons,” she said.
Add-ons such as extended warranties, club memberships and credit life insurance.
Credit life insurance, being “paired” with the loan, made consumers “captive”, she said.
These policies cover the goods in the period the consumer is paying them off, and the credit provider has a legal right to force their customers to pay for such insurance.
“Consumers are not forced to take the credit provider’s insurance when they sign an instalment deal; they can cover the goods under their own insurance policy. But in reality, unless they have the policy with them, they will take the credit provider’s… insurance.”
It was not known what percentage of those who acquired this insurance actually made claims, she said. However it is suspected to be low, making credit life insurance hugely profitable for the providers.
A solution would be for consumers to take out their own short-term insurance policies, and add items to it as they acquired them.
Extended warranties – not in your interest As for extended warranties, consumer bodies have long warned that these are of far more benefit to the companies offering them than to consumers.
In other words, the warranties add a healthy layer of profit to a retailer’s bottom line, at a time when the profit margins on the actual goods they’re selling are shrinking.
The amount paid by the consumer is mostly disproportionate to the item’s value, and the chances of the consumer claiming are not high.
In 2009, I wrote in this column of the case of a man, then earning R2 210 a month before deductions, who went into a furniture store to buy a R3 000 bed and walked out committed to paying more than R8 000 to that company in the course of two years, via monthly payments of R404.
Among the add-ons were a R460 “fabric protector” and a R550 extended warranty. |This on a product that came with a 10-year manufacturer’s warranty!
When I queried this with the furniture retailer – part of a massive group – asking how they justified selling the man that extended warranty, I was simply told he had been given the benefit of a 12-year warranty on the bed, rather than a 10-year one. Unbelievable.
Last week on a domestic flight I sat next to a man who devised the extended warranty product for an appliance and furniture retailer. He told me only 7 percent of the money paid by consumers for extended warranties was paid out in claims.
No wonder the salespeople do such a hard sell on those warranties!
Credit bureau checks One of the unintended consequences of the National Credit Act, Hawkins said, was that it made it difficult for consumers to shop around without jeopardising their credit record.
“Every time a consumer gets a quote from a credit provider… this is flagged on their credit record, and if that consumer gets two or three quotes in quick succession, they are regarded as a consumer in distress,” he said.
That was news to me. Distressing news.
Garnishees – the great debtor rip-off Credit providers and their collecting agents love the garnishee order system because it’s the quickest, easiest way to get money out of debtors who have defaulted.
But the system is rife with irregularities and rip-offs, according to Charlotte van Sittert of the University of Pretoria’s Law Clinic, who presented the clinic’s findings of its audit of the garnishee orders of a medium-sized transport company at the over-indebtedness summit.
Van Sittert referred to them as undesirable practices, and undesirable they most certainly are. Consumer Watch has exposed several dodgy garnishee order cases.
A huge number of South Africans are having their take-home pay eroded by one or more garnishees every month.
It is estimated that between 10 and 15 percent of all employed South Africans have garnishee orders – more correctly named emolument attachment orders – on their salary, and the percentage is higher in government departments where there are generally fewer questions asked by the payroll departments.
How is it supposed to work?
The company hands the defaulting debtor over to a debt collector; they get an attorney to go to court to get an order compelling the debtor’s employer to deduct a certain amount of money from their salary every month and pay it over to them in settlement of that debt.
In 2008 the Pretoria Law Clinic did its first in-depth research into undesirable practices in the garnishee system, and revealed some shocking things.
The same injustices were apparent in their most recent investigation, as Von Sittert revealed.
* Forged consent forms: Before the attorney can go to court to apply for a garnishee, the debtor must sign a form acknowledging the debt and agreeing to the garnishee. In many cases, the collecting agent simply forges this signature.
* The instalment deducted every month is not enough to cover the capital amount, let alone the attorney’s interest and fees – so they end up paying for a long time.
Von Sittert quoted the case, exposed by Moneyweb last month, of a miner who borrowed R1 000, defaulted, and ended up with a garnishee. So far he’s paid R11 690, R10 000 of which is legal fees. And he still owes R3 084.
* Only the capital amount is specified on the garnishee order, so often the payroll department – and the debtor – think they’ve settled the debt, only to be hit with a fresh garnishee order for interest and costs.
* Jurisdiction is a major problem. The Magistrate’s Court Act states that the garnishee must be obtained in the court where the employer and employee are based.
But many of the attorney firms instead apply in a court in another province, often where the magistrate is known not to raise queries.
This adds to the costs, which the debtor pays, and it makes it difficult for them or their employer to approach the court.
* No financial enquiry is done to ensure that the employee is left with enough money to live on.
* The credit provider hands the debt over to two debt collectors, and both get garnishees, so the debtor ends up paying twice.
* Capital amounts owing are inflated, and attorneys fail to provide balance statements to debtors showing them how much they’ve paid and how much is left to pay.
To my mind, a company’s payroll employees should ask the attorneys to see the signed consents and compare signatures.
They should check the capital amounts to make sure that’s what the employee owed. And if the garnishee was obtained in a court outside the area where the person is employed, they should ask for proof of the debtor’s consent to this.
CONTACTS: Both the NDMA and the Credit Ombud provide consumers with free help and advice in debt matters.