Banks extend terms to attract poor customers

JOHANNESBURG – Longer repayment periods on unsecured personal loans had enhanced the affordability of debt for consumers, FirstRand’s chief executive said last week.

In recent years, banks have increased the time over which consumers can repay their debt. A survey by Business Report has shown that some banks were issuing 72-month unsecured loans.While at face value, the instalment may seem lower for a loan with a longer term, the total debt increases significantly.The repayment eventually represents a sizeable transfer of wealth to the lender.But FirstRand chief executive Sizwe Nxasana said personal loans with longer terms made the monthly repayments more affordable.This view was shared by the National Consumer Forum.Thami Bolani, the chairman of the forum, said that although the body was aware that a longer term increased the amount of interest paid, this option enabled access for low-income earners, albeit at a price.”It’s a complicated situation, but it may be the only option for some consumers,” he said.A client service worker at an Absa branch in Johannesburg said borrowers could reduce the extra interest by paying more.”Customers can repay their loans earlier if they want.”Personal loans of amounts less than N$10 000 attract a high interest rate, which is fixed.First National Bank charges 39,8 per cent on a N$5 000 loan, while at Absa the rate is about 36 per cent.Standard Bank offers a variable rate of prime plus 6,2 percentage points.Bolani said consumer knowledge on loans was still lacking, despite the introduction of a new credit law, the National Credit Act.The law requires banks to use tighter lending criteria to prevent consumers taking on debt they cannot afford.Analysts have said that despite the increase in household debt, people could still manage to repay.They base their argument on the debt-servicing ratio – debt repayments as a proportion of disposable income.The debt-to-disposable income ratio has risen to a record 76 per cent.But a study by Credit Suisse Standard Securities showed that the ratio could be higher, up to 135 per cent in some households.The debt-servicing burden was found to be between 25 per cent and 40 per cent, far higher than the official rate.Low-income households were found to have a far greater exposure to unsecured debt than their rich peers.The study found that store credit, family loans and credit card debt were prevalent among many households with lower earnings.The lowest income segment was now paying about 17 per cent of disposable income towards credit cards.- Business ReportA survey by Business Report has shown that some banks were issuing 72-month unsecured loans.While at face value, the instalment may seem lower for a loan with a longer term, the total debt increases significantly.The repayment eventually represents a sizeable transfer of wealth to the lender.But FirstRand chief executive Sizwe Nxasana said personal loans with longer terms made the monthly repayments more affordable.This view was shared by the National Consumer Forum.Thami Bolani, the chairman of the forum, said that although the body was aware that a longer term increased the amount of interest paid, this option enabled access for low-income earners, albeit at a price.”It’s a complicated situation, but it may be the only option for some consumers,” he said.A client service worker at an Absa branch in Johannesburg said borrowers could reduce the extra interest by paying more.”Customers can repay their loans earlier if they want.”Personal loans of amounts less than N$10 000 attract a high interest rate, which is fixed.First National Bank charges 39,8 per cent on a N$5 000 loan, while at Absa the rate is about 36 per cent.Standard Bank offers a variable rate of prime plus 6,2 percentage points.Bolani said consumer knowledge on loans was still lacking, despite the introduction of a new credit law, the National Credit Act.The law requires banks to use tighter lending criteria to prevent consumers taking on debt they cannot afford.Analysts have said that despite the increase in household debt, people could still manage to repay.They base their argument on the debt-servicing ratio – debt repayments as a proportion of disposable income.The debt-to-disposable income ratio has risen to a record 76 per cent.But a study by Credit Suisse Standard Securities showed that the ratio could be higher, up to 135 per cent in some households.The debt-servicing burden was found to be between 25 per cent and 40 per cent, far higher than the official rate.Low-income households were found to have a far greater exposure to unsecured debt than their rich peers.The study found that store credit, family loans and credit card debt were prevalent among many households with lower earnings.The lowest income segment was now paying about 17 per cent of disposable income towards credit cards.- Business Report