The landscape of unsecured personal loans poses a perplexing dilemma for consumers, as an increasing number of these lenders are extending repayment terms up to 72 months, with some even as long as 84 months (that’s seven years) and far beyond what applicants originally sought when applying for credit.
On the surface, offering customers more time to pay off larger sums may sound like a reasonable and pragmatic approach to the challenging economic climate many South Africans find themselves in.
However on closer inspection it becomes clear that these massively stretched repayment windows come at a staggering cost to applicants. Consumers risk paying back a whopping 155% more than their initial loan amount.
Unsecured loans, devoid of collateral, are based solely on creditworthiness, encompassing personal loans, student loans, and credit cards.
Brett Van Aswegen, CEO of Wonga and a credible insight into the personal loan marketplace, has expressed concern for the millions of South Africans grappling with mounting financial strain amid interest rate hikes, inflation, and a weakened currency, which all exacerbates the challenge of debt servicing.
Data from the financial regulator reveals a concerning trend: personal loan lenders are resorting to longer and longer loan terms to circumvent declining consumer affordability, a move that heightens risks for both borrowers and lenders in an already volatile economic climate.
To put it simply: The average consumer is struggling financially more than they were previously in previous years. So loan providers are offering longer repayment periods to reduce the monthly repayment amount customers have to make.
This technically reduces the risk of a customer defaulting on a repayment but ultimately costs consumers much more in the long run through the interest repayments.
The data from the Consumer Credit Market Report paints a stark picture: over 32% of unsecured loan agreements now extend beyond five years, totalling billions of Rand in credit.
Many consumers find themselves ensnared in a seemingly endless debt cycle; often being lured into borrowing more than necessary. Upselling tactics lead borrowers into accepting larger loans with lower monthly payments but substantially inflated overall repayment amounts over extended periods.
The repercussions are evident in the rising rate of non-performing loans, with one in five personal loan accounts falling 90 or more days behind. T
his dismal performance stands in stark contrast to other credit sectors. Indeed, the majority of funded applicants in the unsecured personal loan sector earn significantly below the national average income, compounding financial vulnerability even further.
Consumers (yes I mean you) would do well to closely scrutinize their borrowing motives and carefully align the loan amount and repayment terms with their intended use as strictly as possible.
Opting for extended repayment periods may offer temporary relief through the lower monthly payments, but the long-term burden of interest and fees far outweighs these fleeting benefits.
It's imperative to assess the full cost of credit and repayment terms before committing to a personal loan or face the very real risk of entrapment in a perpetual cycle of debt.
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