As the prices of fuel, electricity and water continue to rise, more South Africans are turning to credit to make a living, bringing renewed focus on how credit is used and the risks that come with it.
With household budgets under pressure, borrowing is becoming a short-term solution for both emergencies and long-term needs. However, increasing reliance on credit is also raising concerns about affordability and over-indebtedness.
Research from loan provider Direct Axis shows that 28% of South Africans apply for personal loan To cover emergency expenses, 20% for home renovation and 11% for education. The figures show how borrowing is being used not only as a safety net, but also as a means to maintain or improve standards of living.
“Whatever the reason, it's important to understand your rights and responsibilities before applying for a loan,” says Gavin Lately, head of product at DirectAxis.
“Research shows that people choose personal loans over other types of credit because the application is straightforward and the approval process is quick. Still, it's important to know what you're getting 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 typically used for high-value purchases such as homes or vehicles, where the lender retains ownership of the asset until the loan is settled. Failure to repay may result in the asset being repossessed and sold. In contrast, unsecured loans are not tied to any asset. He says approval largely depends on the borrower's credit profile, income and overall affordability.
According to Lately, credit scores calculated by registering 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 situation.
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 loans. Applicants must provide proof of identity, residence and income, while lenders must assess current 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 shows that more than 40% of credit-active consumers are classified as having a bad credit record, meaning they are behind in repayments or have an adverse listing. The report also shows that unsecured loans, including personal loans, remain 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 remain high after a series of hikes by the South African Reserve Bank in recent years aimed at curbing inflation. Higher rates directly translate into more expensive loans, increasing monthly payments for consumers and increasing the total cost of the loan over time.
The length of the loan tenure is another important factor. Longer repayment periods can reduce monthly installments, 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 the overall borrowing cost.
Lately says consumers should carefully assess affordability before taking on new debt, especially in an environment where expenses are rising faster than income.
He says affordability should include a buffer for potential interest rate increases and ensure that essential costs such as housing, food and transportation can still be met. Borrowers need to consider the full cost of the loan, including initiation fees, monthly service charges and credit life insurance, rather than just focusing on the prime interest rate.
It is equally important to confirm 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 the loan early, can have a significant impact on the overall cost, although some agreements may include early termination charges.
“Although the NCA makes the lender responsible for checking whether the applicant can afford the loan, it depends on the information provided. So it is important to be honest about your income and expenses. If the loan is approved because you have under-reported your expenses, it will increase your financial pressures. If you cannot make repayments, it will negatively impact your credit score, which may limit your ability to borrow in the future,” says Letley. Are.
personal Finance