Beware the default

The Mail & Guardian has been investigating the practice of emolument attachment orders, which allows a lender to attach a portion of your salary.

While we have focused on the abuses around this system, even if debt collectors are staying within the law, defaulting on a loan can cost you more than you could ever imagine. The power of compound interest, which can work for you when you are saving, has the same affect on debt, except that it is very detrimental to your pocket, with interest adding on to interest.

For example a person taking out a personal loan of R10 000 over a two-year period could pay R638,41 a month. This would include interest charged at 25% a year and initiation fees of R650 and insurance of R70 a month. By the end of the two-year period the customer would have paid R15 321,84 for the loan, if there are no defaults.

If, however, the person defaulted after only making two payments and did not respond to the requests from the bank to resume payment even at a lesser amount, the bank would take legal action. Some companies give a defaulter up to three months or more before they hand a matter over to attorneys.

If the client continues to refuse to pay the debt they will take a judgement against them. The attorneys will then apply to court for an emolument attachment order (sometimes incorrectly called a garnishee order), which will allow the attorneys to instruct the person’s employer to pay over a portion of their salary to repay this debt.

It can take up to a year after default before this order is in place and the funds are being deducted. By now the interest bill has been ticking and is now R2 995.

Added to this are the legal costs where the attorney takes 10% of each installment for their work plus VAT and the employer adds 5% to the installment to cover their administrative costs. In this example, the attachment order is only for R500 as the consumer cannot afford to pay more, so the loan will only be paid off over the next four years.

Again, interest and costs are ticking. If the client and his or her employer adheres to the payment with no further default, at the end of the period the client will have paid R29 273 for the R10 000 loan. Of this amount R24 225 went to the lender, R1 275 to the employer and R2 761,65 in collection fees and R1 011 in legal fees. The cost of the loan has doubled.

There are also many cases where the debtor has avoided payment for so long that the amount they can afford to repay does not even cover the interest due each month. In this case they are caught in a debt spiral and will be paying their debts for the rest of their lives.

What do you do if you genuinely cannot repay the debt or need to come to a separate arrangement? Firstly, don’t leave it until there is a judgement against you.

According to Tami Sokutu, executive director in charge of risk at African Bank, if a borrower’s circumstances change and they can no longer service the loan, depending on the merits of the case, the bank will come to an arrangement with the client.

For example, if the case merits it, they could stop charging interest once the defaulter has resumed payment in order to assist them in paying off the loan quickly.

This can be a lifeline for someone who cannot meet even the basic interest payments.

Many credit providers and service providers, such as doctors or pathologists, are willing to negotiate a repayment plan as long as they know that the debtor is committed to making some payment towards their debt. There are of course many others who are not interested in assisting a consumer in need.

Bad lending practices land consumers in hot water

Reckless lending is a very real problem and certainly one of the reasons why many lower income earners fall into a debt trap.

A reader highlighted this problem when his domestic worker was advanced a loan by a major retailer for the purchase of a kitchen cupboard. The repayments were 40% of her salary and he personally informed the store that it was unaffordable. The domestic worker defaulted and subsequently died. The retailer is now attempting to hold her son responsible for the debt.

According to Marilyn Budow, African Bank’s consumer advocate, in many cases borrowers don’t understand the impact of compounding interest. They simply understand that if they need to repay R500 a month over 24 months, even if they do this on an ad-hoc basis over five years, they believe that they will have paid off the debt in full once they have made 24 payments of R500.

Part of the requirements of the National Credit Act when it comes into force on June 1 this year will require the lender to fully explain the implications of taking on debt.

The issue of reckless lending will gain some teeth — if it can be proved that a credit provider permitted a loan that was beyond the affordability of the borrower, then the loan can be declared invalid and the credit provider will be fined. However, if the customer lied on the application form about the extent of debt then the credit provider will not be liable.

Many of the major credit providers (including the one mentioned by the reader) claim that they already adhere to the rules contained in the National Credit Act, although this is on a volunteer basis and they cannot be challenged unless the amount is less than R10 000.

The reckless lending rules already apply to loans under R10 000 in terms of the Rules of the Micro-lending Finance Regulatory Council (MFRC). Apart from reckless lending there are also high levels of corruption within the garnishee order system, with experts claiming that debt collectors and attorneys are overcharging on fees and interest.

According to Budow, if you do have an attachment order on your salary it is worth contacting the credit provider and obtaining a full statement from them of all charges, costs and interest to have comfort that all these charges are valid.

“Try to negotiate with the attorney if you feel that the totals are incorrect and see if you can come to some other arrangement. If they are unhelpful, contact the Law Society or a not-for-profit advice centre or debt counsellor to assist you,” says Budow.

It is also important to understand the difference between hire purchase and a microloan when making a purchase. Until June 1, hire purchase is governed by the Usury Act, which limits the interest charged on a loan under R10 000 to 20%. If you default the seller has the right to repossess the goods.

However, in many cases the retailer offers the customer a loan. This falls under the micro-lending legislation and there is no limit on how much interest can be charged. Many retailers charge as high as 35% a year.

Another unethical practice is where the credit provider requires the customer to sign a blank acknowledgement of debt the day they take out the loan. This allows the credit provider to immediately start a judgement process to bring a garnishee order to attach a portion of the customer’s salary before they have even defaulted. Don’t ever agree to this, and before you sign anything, understand what you are committing to and ask about other charges such as insurance and administration fees.

0860 OMBUDS (0860 662837) is a single number for consumers to call and they will be connected directly to any of the three offices or have guidelines on whom to contact if in doubt of which ombud office to use for lodging a complaint in the financial industry.