Although it is always a good idea to save up and buy goods for cash, this is not always possible. Most of life’s biggest expenses are things most people can only buy on credit. Whether to finance a car, purchase a house or fund university fees, it is rather unlikely that you would have enough disposable cash to simply pay cash for everything. Most of us, whether we like it or not, will be forced at some point in our lives to apply for loans and credit.
There is, however, such a thing as excessive borrowing with the majority of South Africa’s middle class facing a massive debt crisis. Statistics show that close to 10 million people in South Africa have “bad debt” which means that they have missed three or more of their monthly credit repayments. A high number of people who are unemployed remain in debt and are forced to live on credit they know they cannot realistically pay back.
While it is the responsibility of every individual to make sure that they do not borrow more than what they are capable of repaying, the National Credit Act 34 of 2005 contains certain prohibitions against credit providers entering into reckless credit agreements with consumers.
A credit agreement is considered to be reckless if, at the time that the agreement was made, or at the time when the loan amount was increased, the credit provider:
- Failed to conduct an affordability assessment – the credit provider should take reasonable steps before entering into a credit agreement with a consumer to ensure that the consumer is able to afford the credit repayments; or
- Having conducted an assessment, the credit provider still proceeded to enter into a credit agreement with the consumer even though it was apparent that the consumer did not have the financial means to repay the credit amount, that the consumer did not understand the risks, costs or obligations under the proposed credit agreement; or
- It was apparent when entering into the credit agreement that the consumer would be factually over-indebted.
A consumer is considered “over-indebted” if he/she is unable to satisfy, in a timely manner, all obligations under all credit agreements to which the consumer is a party having regard to their income, liabilities and history of debt repayment.
If a credit provider loans money to a person who is over-indebted, it does so at its own risk as this is termed “reckless lending”. A court may, upon application by the consumer, either suspend the reckless credit agreement until such a time as the consumer is able to repay the loaned amount or may completely set aside the consumer’s obligations under the agreement in any manner that the court considers just and reasonable.
Consumers may defend themselves against legal action by credit providers on the grounds of reckless lending where the credit provider has not exercised due diligence in providing credit.
Should you have any further questions or if you need assistance in defending a legal credit claim please feel free to contact us.