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African Bank – lessons for consumers

8 September 2014
2 minute read

lessons from africa back

The recent collapse of African Bank caught thousands of investors and bank customers off-guard. The beleaguered banks entire business model was centered on high-risk loans that probably should not have been granted as consumers could not afford to repay. It is currently under curatorship after the Reserve Bank stepped in but those who took out loans from African Bank are still faced with debt repayments they can ill afford. Instead of shaking your head at the magnitude of the losses, extract the lessons that you can learn as a borrower.

Get real about affordabilityNo creditor wants a defaulting borrower on their books. However, unscrupulous salesmen who are keen to close a deal will offer you loans you cannot afford. Remember that when a bank is granting you a loan it does not care about your other expenses - its main concern is that you prioritise repayment of their loan! When all is said and done, the onus is on you to figure out whether or not you can really afford the loan.

So, how do you know if you can afford the loan? You should have a clear idea of what your monthly expenses are and whether or not you can actually afford the monthly repayments - despite what the credit provider might say. You should also leave a financial buffer in your budget for unexpected expenses or interest rate increases that could cause your monthly loan repayments to go up.

Read the fine print and shop aroundWhen you take out a loan, take time to read the fine print before you sign on the dotted line. The terms and conditions of any agreement you sign are important and this is more so the case when it comes to financial agreements. Take a close look at the interest rate you are being charged, compare it to the interest charged by other institutions and then work out if it will be more cost-effective to borrow money from another institution or, even better, to save the money instead. For example, if you need a loan of R10 000 for home renovations, you might find it more cost-effective to save R1 000 a month for 10 months instead of taking out a loan that will cost much more than R10 000 by the time you repay it. Consumers who borrowed money from African Bank might have realised that they were being charged higher interest rates than necessary if they had read the fine print carefully and taken the time to shop around.

Your credit record is your problemRegardless of where you borrow from, you always have to repay the loan otherwise you risk creating a negative credit record. Remember that credit records are not only used when financial institutions want to assess your credit risk but are also sometimes a reference point for potential employers. Consumers who borrowed money from African Bank are not “off the hook”. They must continue to repay their loans to ensure that they do not end up with a negative credit record.

Final wordRead our blog on how to borrow responsibly and avoid becoming the victim of an unscrupulous lender. Remember you should only borrow money as a last resort. A far better idea is to set a savings goal and reduce your expenses so that you are able to set money aside.

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