Understanding reckless lending – and how to avoid becoming a victim

"What is reckless lending, and do you know if you have fallen victim to it?"

According to a recent report by Johannesburg-based fund manager Differential Capital, some 7.8 million South African residents have taken out a combined R225 billion of loans without collateral – and left 40% of borrowers in default and millions of people in a debt trap. 

A loan might seem like a saving grace, especially for short-term needs such as furniture and urgent family care. But if credit has been granted recklessly, it could cost you more than you think – including ruining your credit score or having your assets repossessed. This is why it is so important to understand the rules set out by the National Credit Act (NCA) before applying for credit.

Affordability assessments

When applying for credit, your credit provider is legally required to conduct an affordability assessment. This is to ensure that you can afford to make repayments on your debt. 

The NCA says that reckless lending is when your credit provider fails to perform an affordability assessment before entering into a credit agreement with you. Even if you would have passed the assessment with flying colours and could pay back the loan with ease… the credit agreement is still considered reckless.

Credit checks

The affordability assessment should also include a copy of your credit report at the time you applied for credit. The NCA says that if the creditor did not check your credit report before giving you credit, this is indicative of reckless lending.

Terms and conditions

The NCA further specifies that a credit agreement is considered reckless if the creditor did not explain the risks and costs to you, or if you did not understand your obligations in terms of the agreement.

Over-indebtedness

According to the NCA, if you were awarded credit that you could not afford, or if by taking on the credit meant you were unable to pay your debt repayments and living expenses, then the loan was granted recklessly.

So, what now?

If you believe you have fallen victim to reckless lending, you have legal options. If you have a judgement against you and your creditors cannot provide proof of the affordability assessment they conducted before granting you credit, you can raise the defence of reckless lending. 

Should the court find the credit agreement is reckless, it can:
– Write the debt off entirely, which means you are no longer obliged to continue paying the debt.
– Set aside part of your rights and obligations, which means you may still be required to pay off some of your debt, or pay a reduced amount.
– Suspend the agreement for a stipulated duration of time, in which the credit provider may not charge you fees or interest.

How we can help you

When you apply to go into debt review, we will assess your financial situation to determine whether you are over-indebted or not. If we suspect that any of your accounts are reckless, we will approach the court or tribunal on your behalf to have the agreement declared as reckless and the debt written off.

Get in touch with us today.