Consumers beware of these unsecured loans

Consumers must beware of unsecured loans where lenders push the repayment terms to 72 or even 84 months (6 to 7 years) for more than they applied for as they can end up paying back 155% more than they applied for.

Unsecured loans are loans that does not require any type of security and instead of relying on your assets, such as your home or car, as security, lenders approve unsecured loans based on your creditworthiness. Personal loans, student loans and credit cards are examples of unsecured loans.

South Africans are battling with the effects of multiple interest rate hikes and rising inflation and they find it increasingly difficult to service their debt and make ends meet.

Along with the weakening Rand and the increased cost of living, consumers who are already struggling financially must pay higher monthly instalments for credit products such as home loans, vehicle asset finance and long term personal loans, Brett van Aswegen, CEO at Wonga, says.

Data from the National Credit Regulator’s Consumer Credit Market Report (CCMR) for the fourth quarter of 2022 shows an increasing trend where lenders offer unsecured personal loans with a higher maximum loan term to try and get around the impact of lower consumer affordability to reduce the monthly instalment.

Van Aswegen says this means that if an application is declined because you cannot afford to repay it over 60 months, the lender pushes you to choose repayment terms of 72 or even 84 months in some cases.

“This places a great risk on borrowers as well as the lender and ultimately, to the stability of the credit ecosystem, as gauging risk over the long term in a volatile employment market is complex.”

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Almost a third of personal loans exceed 5 years to repay

According to the data, personal loans with repayment terms of more than five years now amount to over 32% of unsecured loan credit agreements by Rand value. The total for these five year+ loans amounted to R37.4 billion in 2022.

Van Aswegen says many consumers are pushed into a long term debt trap with these multi-year loans, as often they are upsold on the value of loan they require. For example, a consumer applies for a R30 000 personal loan over 24 months to renovate her property, with a monthly instalment of R1 900.

The lender then upsells her a R45 000 loan repayable over 72 months with a lower monthly instalment of R1 600.

However, the customer incurs a total repayable amount increase of +155% over a much longer period, pushing the consumer past what she needs into a long term debt trap.

The problem is clear if you look at the CCMR data for non-performing unsecured loans (accounts more than 90 days in arrears) that stood at 20.5% in the fourth quarter of 2022. This means that approximately one out of five open personal loan accounts are in 90 or more days in arrears. Five years ago, this rate was 16%.

“Compared to other credit sectors, unsecured long term lending is by far the worst performing. The short term loan sector for loans of up to R8 000 over up to 6 months, saw non-performing loans come in at 12.7% and credit facilities (credit cards and garage cards) at 10.7% for the same period.”

Van Aswegen says the fact that 48% of the funded applicants across the unsecured personal loan sector earn less than R15 000 per month, adds even further pressure to the unsecured personal loan space.

It is at least R8 800 less than the latest figures on average income for South Africa published by Stats SA.

“This means that even marginal swings in the cost of living will have a material impact for these applicants who, although credit active, are at the most risk financially.”

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Consumers urged to think before they borrow

He recommends that consumers carefully consider why they apply for a loan and ensure that the loan amount and term match what they intend to do with it.

“Applying for a loan of 72 months to go on an extravagant holiday may seem like an attractive option but consider that you will be paying for that week in the sun for the next six years.”

Monthly instalments may be less with longer term loans as they are spread out over a longer period of time, but you will repay so much more because interest and fees are charged over a longer period.

Therefore, you must always look at the full cost of credit as well as the amount and number of instalments before taking up a personal loan.