Did you know that by defaulting on an R8 000 loan, you could end up paying R61 000? This happened to a client of a microlender who stopped making repayments on his loan. Although the bank came to an agreement with him, legally he was obliged to pay off R61 000 in R700-a-month instalments.
What people forget is that compounding interest, which works for you when you are saving, can have a negative effect when you owe money. For example, if you bought furniture for R10 000 and you don’t make any payments for two years, just by adding the unpaid interest – at 35% a year – to the loan you would owe the creditor R19 936. By this stage the creditor would have taken legal proceedings and legal fees would have been added to that amount.
This problem usually occurs because borrowers ignore requests from the bank or retailer to meet their obligation.
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, the companies will take a judgement against him or her. The attorneys will then apply to the 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 his or her salary to repay this debt. It can take up to a year after default before this order is in place and the funds are deducted. By now the interest bill has been ticking and, added to this, are the legal costs where the attorney takes 10% of each instalment for his or her work, plus Vat, and the employer adds 5% to the instalment to cover administrative costs.
On a monthly instalment of R700, that will cost an additional R114 a month which you could have saved if you had come to an agreement with the creditor before the judgement order.There are cases where the debtor avoids payment for so long that the amount he or she can afford to repay does not cover even the interest due each month. In this case the debtor is caught in a debt spiral and could be paying his or her 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? Don’t leave it until there is a judgement against you.
Tami Sokutu, executive director in charge of risk at African Bank, says if a borrower’s circumstances change and he or she 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, the bank might stop charging interest once the defaulter has resumed payment. This could help the defaulter to pay off the loan quickly. This could be a lifeline for someone who simply cannot meet even the basic interest payments.
Many credit providers and service providers 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, others who are not interested in helping.
Know your rights and obligations
Fact 1:
When the National Credit Act comes into force on June 1 this year, it will require the lender to explain fully the implications of taking on debt.
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 in his or her application form about the extent of his or her debt, then the credit provider will not be liable.
Fact 2:
When you sign up for a loan and you are required, for example, to repay R500 a month for 24 months, this does not mean that you can pay on an irregular basis over five years.
If you miss one month’s payment you have defaulted on the loan and the interest charges start climbing.
Fact 3:
If you do have an attachment order on your salary it is worth contacting the credit provider to obtain a full statement of all charges, costs and interest so that you know the charges are valid.
Fact 4:
A common unethical practice is when the credit provider requires the customer to sign a blank acknowledgement of debt the day she or he takes out the loan.
This allows the credit provider to start a judgement process immediately to bring an attachment order to deduct a portion of the customer’s salary – before he or she has defaulted.
Don’t agree to this. Before you sign anything, make sure you understand what you are committing to and ask about other charges, such as insurance and administration fees.