Understated expenses may explain why so many can’t afford repayments

A decade after the National Credit Act (NCA) made if compulsory for credit providers to prevent reckless lending by assessing how much credit you can afford, the minimum expenses used for these assessments have not been updated, resulting in credit being granted to those who may not be able to afford it.

Affordability is critical

Regulations under the NCA were introduced in 2015 with the intention of ensuring that you, as a consumer, were only granted credit you could afford to repay, substantially reducing the risk that you could be become over-indebted.

Ensuring that you can afford any credit for which you apply is both your and the credit provider’s responsibility. You must provide your income and expenses, and the credit provider must do an affordability assessment to determine whether your expenses are at least in line with regulated minimum expenses, and that after paying your expenses, you have enough income left to meet your credit repayments.

The minimum expense norms, as they are known, are the bare minimum expenses that credit providers are required by law to use in an affordability assessment.

If your declared expenses are lower than the minimum expense norms, the higher amount in the norms must be used in any assessment of how much credit you can afford.

The Debt Counsellors Association of South Africa says that many credit providers apply the minimum expenses in affordability assessments as a default, offering credit on this basis.

“Consumers agree that the minimum expense norm is their actual declared expenses,” Vanessa Johst, operations manager at Debt Counsellors Association of South Africa, explains. “Once they do this, the credit provider can take these expenses as factual and can’t be accused of reckless lending later on.”

Expense guidelines are below the poverty line

The problem with using the minimum expense norms is that they have not been updated in a decade, and the amounts are outdated, according to Casper le Grange, national executive committee member at the Debt Counsellor’s Association of South Africa.

For example, in terms of the expense norms, a family of four with an income of R25 000 a month spends a minimum expense of just R2 855 on rent, groceries, transport, and other basic needs, he says.

This is below the upper bound of the poverty line for four people - the minimum income that Stats SA has determined is required to provide food and other basic household needs. There is a lower and upper limit to the poverty line and the current upper limit is R1 634 a person per month.

“Using this example of four people, the upper poverty line would be R6 543 for them, so a minimum expense norm of R2 855 is significantly below this poverty line,” Johst says. “This implies that the lender is actually living below the poverty line, which makes no sense.”

Being honest about expenses

If you lie about your expenses and they are understated, it is likely that you will be granted more credit than you can actually afford to repay after you have met your real expenses. You will soon be in over your head trying to meet your living costs and pay off your debt.

If a creditor, such as your bank, has access to your transactional banking history, they can use this information for your expenses instead, Benay Sager, executive head of DebtBusters, explains. “Non-bank lenders will use the minimum expense norms based on information supplied by the consumer.”

It’s important that you are honest about your income and expenses, as the credit provider can only work with the information you provide. Income is difficult to inflate, as this is visible on payslips or other deposits into your bank account, according to Sager. Expenses are far more complex to assess and open to being under-declared, making it difficult and costly for a creditor to fully investigate, he says.

“You know your finances better than anyone else, but the crux of the problem is that people under-declare their expenses” Sager says.

Being granted more credit than you can afford to repay is likely to lead to problems and if you were not honest about your expenses, it is unlikely that the credit provider will be found to have lent to you recklessly. You will therefore not enjoy any relief for reckless lending when your repayments prove to be too much for you.

No longer a safety net

The minimum expense norms were meant to protect consumers even when they were not completely honest when applying for credit. However, outdated minimum expense norms which don’t reflect the true cost of living can lead to over-indebtedness, undermining the very protections the NCA was intended to provide. 

“Credit is granted when it shouldn’t have been, affecting the most vulnerable consumers,” says Le Grange. “There is an urgent need to update the guidelines in line with the real cost of living.”

Howard Gabriels, credit division lead ombud at the National Financial Ombud Scheme (NFO), says the minimum expense “can’t remain static and must evolve in response to the realities facing consumers today”. However, he says there is no indication that the norms will be reviewed or amended in the near future.

The National Credit Regulator did not respond to requests for comment.

Understated expenses affect everyone

Sager believes that being dishonest affects everyone since lenders don’t conduct in-depth risk assessments to determine a person’s ability to repay a debt. “It puts everyone in a high-risk category, including the honest people,” he says. “This is evident in the high interest rate that everyone pays.”

It’s ultimately your responsibility to ensure that you understand how credit works, the terms of the agreement, and whether you can afford the repayments. The NFO encourages customers to request a pre-agreement statement and quotation for credit. “You have five days to accept or reject the quotation, so use this time to ensure you fully understand the costs and monthly repayments before signing on the dotted line,” suggests Gabriels.