Buli Ndlovu | Marketing Executive | Nedbank Retail and Business Banking | mail me |
The lowering of interest rates that formed part of government’s response to COVID-19 have been a huge help to most South Africans as they faced the combined challenge of a loss of income while still needing to keep up their repayments on their home, vehicle and personal loans and other credit agreements.
While lower interest rates offer short-term assistance by reducing loan repayments, cheaper credit can also be a risky temptation. It is important for consumers and financial institutions to be responsible in the way they use credit in the coming months and years.
Responsible lending
COVID-19 response strategies have driven down interest and inflation rates, but this situation is unlikely to last for too much longer and consumers may soon find themselves having to pay back more on their loans as interest rates are increased again – which is why being responsible with lending and borrowing is very important.
Responsible lending is essentially a commitment by a financial institution to only lend an amount of money to its clients that it is confident they will be able to repay, without getting into financial difficulties in the longer term – especially if interest rates go up.
A responsible lender will make sure that its clients can afford their loans or credit facilities before granting them, and in that way, the person is protected from any risk of financial hardship down the line.
While these responsible lending practices protect the consumer, many people don’t understand this and see them as an attempt by the bank to refuse to give them a loan or give them less credit than they actually want.
It’s not just the role of the bank to be responsible when it comes to loans or credit; it is very important that consumers become more responsible borrowers as well.
It is tempting to take whatever credit being offered
The best way to do this is to be more diligent in managing your expenses and not be tempted into taking too much credit or accepting expensive loan products just because they are offered to you and seem appealing in the current low-interest rate environment.
However, that the financial challenges and high amounts of debt caused by COVID-19 and lockdown can make it very tempting to take whatever credit is offered to you right now.
Anyone who is worried about having a lot of debt now is advised to consider alternative, more responsible, solutions, like a debt consolidation loan from a reputable bank.
It may seem contradictory to be taking out another loan, but a debt consolidation loan can be one of the most effective solutions for anyone struggling to meet their debt repayments, and if that loan is provided by a responsible lender, it will be structured in a way that helps the person pay less every month to cover all their debt obligations, and possibly even pay off the total amount of debt they owe in a much shorter time – both of which are key responsible lending principles.
In conclusion
Even before COVID-19, South Africans were struggling with high amounts of debt, with some commentators estimating that, at the end of 2019, we owed a combined amount of around R1.9 trillion.
With the vast majority of people (around 80% according to TransUnion) finding that their income has been negatively impacted by the pandemic, the temptation to turn to whatever credit is available, just to make ends meet is stronger than ever.
It’s never been more important for banks and consumers to stay responsible in their lending and borrowing, not only to protect people from financial hardships when interest rates go up, but also to ensure that when our economy starts to grow again, as many South Africans as possible are in a good financial position to be able to benefit from it.