OPINION: Know your credit provider to avoid traps
“There are different kinds of lenders and among these are formal and informal lenders,” says Dhashni Naidoo, a programme manager: consumer education at FNB. “Formal lenders include banks and non-bank lenders who operate according to regulations set in the National Credit Act. Informal lenders include loan sharks that typically operate outside of the laws that are meant to protect consumers from unfair lending practices.”
Here are the different types of lenders and how they operate:
Banks: These are formal credit providers registered with the National Credit Regulator. They offer various types of credit such as personal loans, credit cards, overdrafts on cheque cards, home loans, vehicle finance and student loans. The interest rates charged on credit agreements are regulated by the National Credit Regulator and interest rates depend mainly on your credit profile.
“Borrowing from a formal credit provider such as a bank has several benefits. The formal contract that is signed protects both the customer and the bank as it stipulates the terms and conditions. Banks also provide a quote that highlights monthly repayments and associated costs such as admin fees and life insurance - depending on the type of credit you acquire,” says Corné Jordaan, a business process optimisation head at FNB Loans.
“When taking out a personal loan, for example, the customer will have the option of selecting a repayment period - the longer the period the lower the monthly repayment. This allows the customer to choose the option that best suits their financial position. A personalised interest rate will also be offered, which is based on the customer’s credit profile and affordability. These practices are in place to provide customers with adequate information to make an informed decision.”
Non-bank credit providers: These lenders provide long and/or short-term credit and can include larger organisations, smaller businesses and even retail shops such as department, furniture and cell phone stores. What is of importance is that, like banks, they are also governed by the National Credit Regulator, they also conduct checks before granting credit.
Loans sharks/mashonisas: Operate as informal financial institutions and are not registered with the National Credit Regulator. They offer credit in the form of cash and generally charge unreasonably high interest rates. Access to the funds is usually easy with immediate access and not much paper work. The lack of checks done can result in more credit being granted than a customer can afford.
“When a lender such as a bank requests your bank statement, payslip and household expenses, it’s to ensure that if you qualify, it’s an amount you can afford to repay. The checks are done to manage the credit provider’s risk while protecting the borrower so they can get the credit and still be able to meet other expenses,” said Naidoo.