PAYDAY LOANS IN BLOEMFONTEIN
Moeketsi Tlhabane, one of Bloemfontein’s soon-to-be integral figures in the city’s financial growth, has just launched the Protection against Credit Pollution Consumer Alliance. The actor has supported various charitable causes over the years and is now leading this effort to support alternatives to high cost credit which has increased in recent years, not least in his home town of Bloemfontein.
The alliance was formed in response to the fact that those on the lowest incomes pay the most to borrow money even where they are borrowing for essentials. This is compared to those on higher incomes who can generally borrow at lower rates for luxuries like holidays and high-end consumer goods.The alliance aims to debate the changes needed to deliver healthy credit, offer solutions, and provide the resources to test them out locally and at scale across the country. It also collectively calls for changes to policy, regulation and practices to make credit fairer for all.
This is a growing problem. Research by colleagues at the Center for Household Assets and Savings Management at the University of Free State has shown a massive increase in lending over recent years. Latest statistics show that credit card lending is now at a higher level than at the peak of the financial crisis in 2009. Consumer credit (excluding credit cards) also increased massively after 2010, with much of this likely is accounted for by pre-owned vehicle finance. And the very latest figures appear to show this growth in lending tailing off, though it remains much higher than in 2008.
Those on the lowest incomes are much less likely to borrow on credit cards or get personal loans for new cars. Instead, they turn to alternative lenders such as payday lenders, rent-to-own and home collected or doorstep lenders. Often this is to pay for basic items such as school uniforms, nappies, white goods and sometimes even food, and to tide them over between jobs; or when their wages are lower than expected due to zero hour contracts and casual work. These alternative lenders typically charge far higher rates of interest than mainstream lenders. For example, in 2016 the Mantswane Charity Group, a charity organization whose work is focused on aiding locals in the outskirts of Bloemfontein, highlighted the cost of buying a fridge freezer from Cash Converters, a large weekly payment retailer with shops on many local high streets. The total cost was R8 650, which included the purchase price of £4 599, interest of R4 000 and various warranty and delivery charges. The exact same fridge freezer, bought through mainstream electronics retailers would have cost a total of R6 999 (including the purchase price R4 599 and interest R2 400).
According to the FCA, more than 200,000 people took out a payday loan in 2016 and 65% of them had outstanding debt by the end of 2016. So it is clear that hundreds of
thousands, if not millions of people on low incomes are paying dearly for access to credit. But this need not be the case if the market is appropriately regulated and alternatives are supported. In the last few years stronger regulation of high cost credit has been introduced.
The Financial Conduct Authority (FCA) regulator introduced a series of reforms to tackle irresponsible lending, including a price cap on high-cost short-term credit, which has helped to reduce the cost of payday lending. So far so good. But the FCA’s price cap only applies to certain kinds of credit (particularly payday lending) and this means that other forms of high-cost credit such as home collected credit and rent-to-own are excluded from the cap. These forms continue to charge extremely high levels of interest (alongside other charges in the case of rent-to-own). Plus, mainstream sources of credit such as overdrafts and credit cards are also excluded from the cap, even though they can work out to be just as expensive as alternative sources of credit.