AFFORDABILITY OF A LOAN

WHAT DOES IT MEAN TO ME AS A CONSUMER?

To buy or not to buy, that is the question. Consumers requiring finance generally have two options available, i.e. saving-up or saving-down. Saving-up means that you save monthly (or at any other interval as determined by you) until you have adequate funding to buy the item that you need. Saving-down, on the other hand, means that you obtain a loan up-front and “save-down” by repaying the monthly installment on the loan taken.

The purpose of this article is to sensitise consumers about the second option, saving-down or servicing a loan. Consumers should be aware of their rights and responsibilities and should refrain from entering into loan agreements that they cannot afford.

Affordability refers to the consumer’s ability to repay the loan on the agreed time. This means that the consumer should be able to service all existing obligations, plus the new loan, and still have enough money to sustain him/herself for the rest of the month.

This brings us to the issue of over-indebtedness. What is over-indebtedness? A consumer is over-indebted if the majority of available information at the time of evaluating the loan application indicates that the particular consumer is or will be unable to satisfy, in a timely manner, all the obligations under all the credit agreements to which the consumer is a party, having regard to the consumer’s:

• Financial means, prospects and obligations;

• Ability to satisfy, in a timely manner, all the obligations under the credit agreements to which the consumer is party, as indicated by the consumer’s history of debt repayment.

A consumer, prior to entering into a loan agreement, must:

• Understand and appreciate the risks and costs

of the loan and his/her obligations under the loan agreement.
• Provide debt repayment history (as ascertained by making enquiries on a credit bureau, e.g. Compuscan, Transunion ITC, etc.).

• Take into consideration their existing financial means, prospects and obligations.

It is important for consumers to truthfully answer all questions as posed by the credit provider as it will assist in the correct assessment of the application.

Can I afford the credit?

As a consumer, you should perform an independent assessment of your financial situation by carefully checking your latest three (3) bank statements and salary slips. From your bank statements, make a list of all your monthly expenses in order to calculate your existing financial obligations vis-à-vis your monthly income. Once you have performed an assessment of your current expenses, see what amount is available and whether it is enough to cover the new loan that you consider taking out. To check whether you can afford the new loan, the repayment of the loan should not exceed 50 percent of your net monthly income or 1/3 (one-third) of your gross income, whichever is the lesser amount.

When doing your calculations, make sure that you consider expenses

pertaining to:

• Accommodation (mortgage bond or rental payments);
• Installment credit (i.e. vehicle installment, clothing accounts, etc.);
• Transport (fuel, maintenance of vehicle);

• Food expenses/groceries;

• Education (school fees, etc.);

• Medical expenses;

• Water and electricity (plus other municipal

rates and taxes);

• Insurance policies;

• Domestic help;

• Child support/maintenance payments;

• Entertainment (i.e. DSTV); and

• Existing debit orders not covered above.

Note

It is important for consumers to accurately disclose all financial obligations to the credit provider, so as to be able to conduct the affordability assessment.

If you experience difficulty in servicing the loan

Once the credit has been granted and the consumer experiences difficulty in meeting the monthly obligations, the consumer must, without delay, approach the credit provider for the re-arrangement of the debt, which may involve extending the repayment period resulting in a reduced installment. It is important for these arrangements to be made by the consumer. Do not remain quiet and hope that the debt will go away – it will not disappear and you are merely aggravating the situation which may lead to legal action being taken against you by the credit provider.

In conclusion, always borrow in a responsible way and do not take credit that you cannot afford.

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