What consumers should know when taking a short-term loan

Following the recent nationwide crackdown by the National Credit Regulator (NCR) and the South African Police Service (SAPS) on illegal microlenders, or “mashonisas”1, South Africans are being urged to think twice before borrowing money, particularly from those that are unregistered. 

It's undeniable that the majority of households feel the financial pinch ahead of the festive season and the start of the new year. And while a quick loan from a microlender may appear to be a lifeline to make it through the month, it's essential to remember that these often come with hidden dangers, such as excessive fees, high interest rates, and unscrupulous collection practices. 

The financial exclusion of many individuals and small businesses - owing to lack of credit history, collateral, and high banking costs - has fuelled the rise in informal lending practices. Our insights suggest a 2% year-on-year increase in microlenders, with 4,622 operating in the country as of August this year. Moreover, there has been a 14.5% surge in consumers with microloans over the past year, up from 2,664,475 to 3,116,687.

To mitigate instances of consumers falling into a trap of over-indebtedness, financial education, credit counselling, and the enforcement of fair lending laws are critical in helping borrowers make informed decisions and avoid escalating debt that they will struggle to repay.

Before taking on new credit, consumers and small business owners must verify a lender’s credentials before signing and be aware of clear warning signs that could indicate a potentially harmful lending agreement. Such examples include the lender being unregistered, high interest rates, pressure to sign quickly, demands for unusual collateral or threats, vague loan terms, and aggressive marketing or unsolicited offers. 

During financially stressful times such as December, borrow only what you can realistically afford to pay back. It is crucial to utilise only the services of reputable lenders that are registered by the NCR, and ensure that all fees and terms are clear and easily understood. Where possible, consider budgeting, saving, or seeking other low-cost alternatives before taking on high-interest loans.

Despite short-term borrowing providing much-needed but temporary relief, the only way to build a fair and sustainable microfinance sector in South Africa takes more than consumer caution alone. Stronger regulation, greater financial inclusion, borrower education, and social support are essential to ensure that lending institutions responsibly serve public needs. Here, transparent, data-driven practices will be instrumental in ensuring fair pricing, responsible risk assessment, and building a foundation of trust between lenders and consumers. 

When consumers are empowered through education and lenders are held to fair standards, all South Africans will reap the benefits. If we can achieve this, we can build a more financially secure South Africa; one where credit serves as a tool for progress, not a pathway to debt and greater despair.

*  Dhever is the head of credit analytics at Mettus.

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