If you do need to borrow money, make sure you borrow from a reputable, registered institution and that you are able to afford the repayments.

The Festive Season is a time when many people fall into a debt trap. They don’t properly budget for things they need and end up spending money on wants not needs – often more than they can afford to spend. Funding the festivities with debt is expensive and should always be avoided.

However, in some circumstances you may need to borrow money. You have a number of options of where you can take out your loan. Consider this carefully before you make a final decision. Make sure that you write up a budget first and know exactly how much you can afford to pay back. To protect your credit rating you must pay each instalment on time and pay back the loan over the agreed period.

Legal and illegal lenders

What is a legal lender? Any company or financial institution who offers loans to consumers must be registered with the National Credit Regulator (NCR) as a registered credit provider. You can check that a company is registered at www.ncr.org.za. Borrowing money from registered lenders protects both parties in the agreement.

• Reputable lenders will check your credit record and lend you the money based on your previous track record of paying back debt as well as your ability to afford the loan.
• They treat you with respect – you are a valued client.
• There is a written contract – both parties understand the terms of the loan.
• In some cases interest rates may be negotiated. Always check what the rate is before you sign.
• If you default on your loan, the lender will follow the correct legal processes to ensure that the loan is repaid.

What is an illegal lender?

So-called ‘loan sharks’ operate outside the law and are not licensed to lend people money – loan sharking is a criminal offence. People with a poor credit rating will not be able to obtain a line of credit from a registered credit provider and may, in desperation, turn to a loan shark for the money.

• They often come across as nice people – very willing to help you out of your predicament, but the relationship will quickly turn sour, especially if you miss a payment.
• They may ask for your ID book, bank card or other important documents to ‘secure’ the loan.
• Interest rates are very high. In some cases you may be asked to pay back double of what you have borrowed.
• If you get behind in your payments, you are likely to be harassed.
• Because loan sharking is against the law, the loan shark cannot use legal processes to obtain his/her money should you default on your loan and may resort to threats and physical violence to get you to pay.
• You may resort to borrowing more money from another loan shark to pay back this loan. This creates a never-ending cycle of debt and may result in the destruction of personal relationships as your financial situation declines.

Borrowing or lending money from friends and family

The National Credit Act (NCA) does not apply to the lending and borrowing of money between family members and friends and is not illegal.

Borrowing

Money can cause serious rifts in any relationship. If you approach a family member or friend to ask them to lend your money, do so without pressuring them or ‘guilting’ them to help you out. Be honest about why you need the money. Work out a payment plan based on your budget. Agree to pay back the money in a prescribed time and if they ask for interest (and they can), be willing to pay it. If you can’t, due to some unforeseen event, make the monthly payment, be upfront with your friend or relative. Try to avoid skipping payments and get the debt paid off as soon as possible. No relationship is worth destroying over money.

Lending

If you are approached by a friend, relative or even a staff member to borrow money, don’t give an immediate answer. Think about it and get back to them. Don’t be afraid to ask questions about why they need the money. Consider the history of the person. Is this the first time they have asked for a loan or are they constantly needing money? If they have borrowed in the past, have they paid back the loan in a timely manner? If you notice a problem of constant borrowing, can you assist with writing up a monthly budget? If you do decide to lend the money, make sure they know that the money is a loan and not a gift. Write up a document for both of you to sign. State how much the loan is, if it is interest-free or if you are asking for a small amount of interest. Also add a date by which the loan must be repaid. It may seem awkward to ask them to sign this, but it is in the best interest of both parties. This is not only a protection so you get your money back, but also a safeguard for your personal relationship going forward.

References

1. Paul Slot, Director at Octogen, www.Octogen.co.za
2. www.LoveMoney.com
3. www.MoneyCrashers.com
4. www.Debt.org