THE ROOT OF THE PROB­LEM

Finweek English Edition - - MONEY -

Re­tail­ers are a core part of the prob­lem. In fact, it has reached a point where many large fur­ni­ture re­tail­ers rs are so re­liant on the prof its earned on t heir credit book, that they can no longer be classed as fur­ni­ture re­tail­ers at all. It would be more ac­cu­rate to call t hem credit providers rs who hap­pen to sell fur­ni­ture ure on the side.

You’ll see how f iercely they pro­tect their loan book when n you try to set­tle a loan ac­count t early, as I did with Mar­garet. They hey ini­tially re­fused to al­low me to do so with­out mas­sive penal­ties. I’m pretty s ure t hat ’s i l l ega l , i f not t ut tt t erly l im­moral.

While I un­der­stand that the in­ter­est rates must be high to ref lect the high r i sk i nher­ent i n t hese credit agree­ments, the same can­not be said for the inf lated fees and the credit life poli­cies thrown in. In fact, the credit life poli­cies as they are cur­rently sold should be in­ves­ti­gated by the au­thor­i­ties. They are ex­tremely prof­itable for the in­sur­ers be­cause the pre­mi­ums are set way higher than the true risk be­ing un­der­writ­ten. In the­ory, the pre­mi­ums should also de­crease over time as the loan is paid off, since the risk is re­duc­ing – but they do not. And what really grates me is how they’re sold. Con­sumers are led to be­lieve t hat t he re­tailer is do­ing

Re­tail­ers are also clearly fail­ing to prop­erly as­sess the af­ford­abil­ity of the loan re­pay­ments be­fore grant­ing loans to their cus­tomers. Mar­garet is a case in point. The re­tail­ers’ ac­tions are ac­tu­ally in breach of the Na­tional Credit Act. I would love for it to be tested in court, but un­for­tu­nately the af­fected peo­ple wouldn’t be able to af­ford the le­gal fees. In fact, most of them aren’t even aware that this is an op­tion. Most of them aren’t even aware that a Na­tional Credit Act ex­ists. Lucky for the re­tail­ers.

The con­sumer is also to blame. Or more ac­cu­rately, the lack of con­sumer ed­u­ca­tion is to blame. Mar­garet has no idea what an in­ter­est rate means, or what a loan term means. All she knows is that a big re­tailer was will­ing to let her take the hi-f i home with­out her hav­ing to fork out the full R3 000 up front. The in­ter­est rate, the fees and the loan term were all ir­rel­e­vant, and she didn’t un­der­stand t hem any way. And i f t he big clever re­tailer has worked out that she could af­ford the monthly re­pay­ment then it must be true. They know what they’re do­ing, right?

It’s not just SA that suf­fers from this. We saw it hap­pen­ing in the US as well be­fore the hous­ing bub­ble col­lapsed. Banks were grant­ing home­loans to NIN­JAs (“No I ncome No Jobs or As­sets”), know­ing full well that th­ese lo loans would even­tu­ally de­fault. They on-sold th­ese toxic as­sets to other in­sti­tu­tions, n net­ting a nice profit and get­ting rid of the prob­lem. Even­tu­ally, this game of high-stakes passth the-par­cel had to end and the world is still feel­ing the reper­cus­sions.

Can you really blame the con­sumer here? Yes, and no. Yes be­cause re re­spon­si­ble adults should know bet­ter th than to take on debt that is un­af­ford­able. No be­cause th­ese adults – es­pe­cially in SA – sim­ply don’t have the skills or the ed­u­ca­tion to make that as­sess­ment in the first place. And whose fault is that? I would ar­gue that it’s our fault. It’s a mas­sive fail­ing of our ed­u­ca­tion sys­tem, and it’s one we can’t af­ford to ig­nore for much longer.

Let’s teach our kids how to bud­get when they’re at school. It will be the most use­ful les­son they’ l l ever learn. As­sum­ing, of course, that their text­books ac­tu­ally ar­rive on time… Dr Gavin Sy­manowitz is an ac­tu­ary and founder of Feed­back­Rocket.com, an award­win­ning on­line in­no­va­tion that en­ables anony­mous man­age­ment feed­back.

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