THE ROOT OF THE PROBLEM
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.