With rising costs of living, many South Africans are turning to personal loans for both emergencies and long-term needs.
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As fuel, electricity, and water costs continue to climb, more South Africans are turning to credit to stay afloat, placing renewed focus on how loans are used and the risks that come with them.
With household budgets under strain, borrowing is increasingly becoming a short-term solution for both emergencies and longer-term needs. However, the growing reliance on credit is also raising concerns about affordability and over-indebtedness.
Research by loan provider Direct Axis shows that 28% of South Africans apply for personal loans to cover emergency expenses, 20% to fund home renovations, and 11% for education. The figures reflect how borrowing is being used not only as a safety net, but also as a means to maintain or improve living standards.
“Whatever the reason, understanding your rights and responsibilities before applying for a loan is crucial,” says Gavyn Letley, DirectAxis’ product head.
“The research shows that people chose personal loans over other types of credit because the application is straightforward and the approval process is quick. Nonetheless, it’s important to know what you’re getting yourself into.”
He says personal loans typically range from R8,000 to R350,000 and are repaid, with interest, over an agreed period. These loans fall into two broad categories: secured and unsecured.
Secured loans are generally used for high-value purchases such as homes or vehicles, where the lender retains ownership of the asset until the debt is settled. Failure to repay can result in the asset being repossessed and sold. Unsecured loans, by contrast, are not tied to any asset. Approval depends largely on a borrower’s credit profile, income, and overall affordability, he says..
According to Letley, credit scores, calculated by registered bureaus, play a central role in this process. Consumers are entitled to one free credit report each year, a provision designed to improve transparency and help borrowers better understand their financial standing.
The regulatory framework governing lending in South Africa is set out in the National Credit Act, which requires lenders to conduct affordability assessments before granting credit. Applicants must provide proof of identity, residence, and income, while lenders are обязed to assess existing debt levels and spending patterns.
Despite these protections, national data shows that many consumers remain financially vulnerable. According to the National Credit Regulator, its latest Consumer Credit Market Report indicates that more than 40% of credit-active consumers are classified as having impaired credit records, meaning they are behind on repayments or have adverse listings. The report also shows that unsecured credit, including personal loans, remains one of the fastest-growing segments of the market, even as default risks increase in a weak economic environment.
This trend is unfolding against the backdrop of rising borrowing costs. Interest rates have remained elevated following successive hikes by the South African Reserve Bank in recent years, aimed at curbing inflation. Higher rates translate directly into more expensive debt, increasing monthly repayments for consumers and raising the total cost of credit over time.
The length of a loan term is another critical factor. Longer repayment periods may reduce monthly instalments, making loans appear more affordable in the short term, but significantly increase the total interest paid. Shorter terms, while more demanding on a monthly basis, reduce overall borrowing costs.
Letley says consumers should carefully assess affordability before taking on new debt, particularly in an environment where expenses are rising faster than incomes.
Affordability, he notes, should include a buffer for potential interest rate increases and ensure that essential costs such as housing, food, and transport can still be met. Borrowers also need to consider the full cost of credit, including initiation fees, monthly service charges, and credit life insurance, rather than focusing only on the headline interest rate.
Equally important is verifying the legitimacy of the lender. Consumers are urged to ensure that credit providers are registered and to be wary of requests for upfront fees or pressure to sign agreements without adequate review.
Flexibility in repayment, including the option to settle a loan early, can also have a significant impact on overall costs, although some agreements may include early termination fees.
“While the NCA makes the lender responsible for checking whether the applicant can afford the loan, it relies on the information that is provided. That’s why it’s important to be honest about your income and expenses. If a loan is approved because you’ve under-reported your expenses, it will add to your financial pressures. If you then can’t afford the repayments, it will negatively affect your credit score, which could limit your ability to borrow in the future,” says Letley.
PERSONAL FINANCE