Beware debt padded with extra costs

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Copy of DebtTrap http://www.sxc.hu/

Imagine you need to buy yourself a double bed.

The retail price is just over R4 000, but you don’t have the cash, and you don’t have a credit card, so you’re forced to sign a credit agreement.

So you sign, and by the time the furniture store has added goods and life insurance, an extended warranty, club membership, a delivery fee and service fees, the total amount you owe has swelled to R11 247, to be paid off at R469 a month.

Then imagine that you don’t quite earn R1 000 a month as a gardener, and that you’re married with six children to support.

So before you’ve bought a loaf of bread, almost half your earnings have gone to paying off that double bed.

For two years.

The gardener in question is William Mlilo of Delft, and he signed this deal at Price n Pride furniture store in Belville, Cape Town, last April.

He couldn’t keep up the payments, and by January he’d been handed over to debt collectors.

His former employers, Norman and Judy Thomson, took up his case with the JD Group, which owns Price n Pride and many other furniture retail brands.

Norman Thomson, who recently retired as financial director of a large retailer, said he was appalled that the deal was concluded in the first place, and argued that it was clear that Mlilo could never afford the repayments, and that, being semi-literate and unsophisticated, he’d simply written his surname, in shaky, disjointed letters, where told to do so.

JD Group’s Grant Whitfield was “extremely efficient and helpful”, Thomson said, and accepted R1 562 in full settlement of the bed debt.

But the couple, concerned about how Mlilo could possibly have passed the required affordability test, raised the case with me.

“Having paid the R469 bed instalment, he would have been left with R250 a month to live on,” Thomson said.

“How can a company allow an individual to commit financial suicide with this sort of contract?

“Any fool could see that he could not afford this debt.”

I took up the case with Whitfield, and received a response from Phillip Kruger, chief executive of JD Financial Services.

It makes for fascinating reading.

He said a full affordability assessment was conducted with Mlilo in the Belville store that day, and all the elements of the credit agreement were explained to him.

He agreed that Mlilo said he earned R980 a month, and said he declared his monthly expenses to be just R250, because he lived with his parents in an RDP house, and additional expenses were shared by other family members.

“A further verification was concluded at the credit bureau to confirm if there were any undeclared expenses, and there were none,” Kruger said.

He said Mlilo had professed to be single with no dependants, and his employer had been contacted to confirm his employment.

“Although a disposable income of R730 was available, our risk management system only permitted a maximum instalment of R511, of which Mr Mlilo took an instalment of R469.

“This is an additional buffer that we include in case of undeclared expenses.”

When the Thomsons queried the deal, and informed the company that Mlilo was married with six children, it was converted to a cash transaction, and Mlilo, with help from the Thomsons, ended up paying only the cash price of the bed, plus the delivery charge.

Kruger pointed out that the JD Group did not charge the maximum fees and rates laid down by the National Credit Act (NCA).

He concluded: “Given the current regulatory focus on consumer affordability and reckless lending, we are refreshing all our NCA training, with specific focus on affordability calculations.”

Good to hear.

Without the help of the Thomsons, that bed debt would have gone on to attract interest and debt collectors’ fees, spelling certain financial ruin for Mlilo.

Dependants or not, shared living expenses or not, R469 out of a R980 monthly income is a disproportionate amount to pay to settle a bed purchase, one that was padded with interest and all manner of extra costs.

Life and goods insurance alone totalled R2 250.

“No matter what they say they did, William could not afford this debt, and a very simple, two-minute discussion with him would have highlighted that fact to any reasonable person,” Judy Thomson said.

“It should have been very apparent that there was no way he understood what he was signing.”

Affordability calculations aren’t the only aspect of the lower end of the furniture business in need of refreshment, in my view.

Those massive extras need to be done away with in some cases – extended warranties on beds, for starters – or at least severely trimmed, in the case of the insurances.

And there should be extraordinary procedures in place for dealing with illiterate consumers.

Pretoria News


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