The dangers of informal lending in South Africa

When money is tight, many South Africans turn to informal lenders for quick cash. These lenders often promise fast approval and no paperwork, but the risks are numerous, and the dangers of informal lending are frequently underestimated.

Because informal lending operates outside South Africa’s regulated credit system, borrowers are exposed to high interest rates, hidden fees, and aggressive collection practices. What starts as a short-term solution may quickly lead to deeper financial trouble.

What is informal lending in South Africa?

The term “informal lending” generally refers to lending schemes or practices that are not regulated by a registered, accredited financial institution, such as a bank or a credit provider registered with the National Credit Regulator (NCR).

These schemes often involve unsecured loans and are popular because they bypass affordability checks. They typically target people who are already overindebted and in need of quick cash.

Because these lenders are not registered with the NCR, there is no oversight, creating serious unregulated lending risks.

This means they can:

• Charge very high interest rates
• Add hidden fees and costs
• Use pressure tactics to recover their money
• Draw up confusing contracts you may not fully understand – or sometimes provide no formal contract at all

By ignoring consumer rights and operating outside the law, these lenders can put borrowers in considerable financial trouble.

Regulated debt solutions, such as debt counselling, can help if your debt has become unmanageable.

Why people turn to informal lenders

Many South Africans who don’t qualify for loans from formal lenders turn to unregistered lenders, more than 40,000 of which operate across the country.

These lenders often target individuals who have poor credit records or have been “blacklisted” – even though the term has no legal basis in South Africa.

They can charge very high interest, along with fees and penalties that are not disclosed upfront.

These illegal practices trap borrowers in damaging debt cycles and increase informal loan risks.

Common types of informal lending schemes

Examples of these schemes include but are not limited to stokvels, pyramid schemes, microlending, and various investment clubs.

However, it’s important to recognise that some of these schemes are above board and safe – for example, a vast number of South Africans invest in legitimate stokvels that are registered with the National Stokvel Association of South Africa (NASASA).

Pyramid schemes are always illegal. They lure people in with promises of quick, high returns, but these “profits” are paid using money from recruits rather than genuine investment activity. The scheme collapses as soon as recruitment slows, leaving most participants – especially those who join later – with losses instead of returns.

Be careful of lenders who operate only through WhatsApp/social media, ask for upfront payments, or request your ID/bank cards as security – these are common signs of NCR unregistered lenders and loan sharks in South Africa.

The risks of borrowing from informal lenders

The informal lending industry is rife with mashonisas, also known as loan sharks in South Africa, who do not:

• Disclose costs upfront
• Conduct affordability assessments (required by the NCA)
• Offer legal protection for borrowers

Many have a reputation for “predatory” lending – loan practices that are unfair or abusive to borrowers.

You may not be able to afford the payments

If you are already in financial trouble and struggling to meet your current debt obligations, borrowing from informal lenders may simply compound your debt problems.

These lenders don’t assess affordability, so they won’t tell you if you can’t afford a loan. This can push you to borrow far more than you can afford to pay.

Taking on such debt can worsen financial stress and increase the risk of falling behind on payments.

Understand your financial health before borrowing.

Extremely high interest rates

Loan shark interest rates are often exorbitant, making repayments very expensive – far higher than the legal maximum for loans. This is because the lender needs to recover the cost of the loan in a shorter period.

You can end up paying anything from 30% to around 100% above the 27.75% (6.75% repo rate + 21%) currently stipulated for unsecured credit transactions by the National Credit Act.

This can lead to a situation where you’ll pay many times the original amount of the loan.

It doesn’t solve your debt problem

It is easy to understand why you may consider informal lending. Life and finances are stressful, and you need help.

However, because informal loans carry high interest and come with short repayment periods, they rarely solve underlying debt problems. They can help you fill a gap, but won’t make it easier for you to manage your money.

Instead, you can get caught in a debt trap, especially if you borrow again to repay earlier loans.  

Need to rehabilitate your finances? Debt counselling can help.

Not covered under debt counselling

Another pitfall of informal lending is that if the lender or creditor is not accredited or registered with the National Credit Regulator (NCR), you are not protected under the National Credit Act. This means the loan can’t be included in the debt counselling process.

Even if you enrol in debt counselling, informal lending credit agreements can’t be negotiated. This can leave you with unsecured, unprotected debt – and few, if any, legal options.

Read our handy guide to debt counselling to find out more about this legally mandated credit relief solution.

Illegal and dangerous collection methods

If you are unable to pay your debt, you could find yourself in a dangerous situation, where the lender may threaten your safety – or even your life.

Some informal lenders have seized clients’ identity documents or bank cards, directly collected social grant payments, or threatened people with violence if they don’t pay – all of which are illegal under lending laws.

Others exploit the absence of a formal contract by using coercion or criminal tactics to recover payment – a common risk when dealing with NCR unregistered lenders.

Fortunately, the National Credit Regulator (NCR) takes steps to control illegal lending practices. In 2024, the NCR, the South African Police Service (SAPS), and the South African Social Security Agency (SASSA) undertook a joint operation in De Aar, Northern Cape, resulting in the arrest of seven unscrupulous credit providers. Police confiscated 81 bank cards, seven SASSA cards, 41 ID books, nine loan books, and R71,506.40 in cash from the suspects.

Meanwhile, in Loxton, the Hawks arrested three similar credit providers, confiscating 18 bank cards, four SASSA cards, two ID books, and one SAPS identity card from the suspects.

Why informal lending is not a sustainable solution

Although informal lenders are quick to offer cash when formal lenders turn you away, this kind of lending is rarely in your best interest.

The high costs, lack of legal protection, and risk of exploitation and even harassment make it both physically and financially risky.

Vulnerable borrowers can become trapped in worsening debt cycles, with no end in sight.

Borrowing from informal lenders may be done with the best intentions, but it can lead to increased stress, risk, and ultimately financial instability that threatens your future security.

This is especially true if a predatory lender tries to persuade you to take out a new loan to service existing debt. In this case, you should contact the National Credit Regulator (NCR), which can advise you on your next steps.

Compare debt solutions to find out which may work best for you.

Safer alternatives to informal lending

There are safer ways to resolve your financial struggles than borrowing from informal or predatory lenders.

These options offer legal protection, help you regain control of your finances, and often come with better terms and structured support.

Here are some options to consider:

Budgeting and financial planning support

One of the best ways to improve your financial situation is to get a clear picture of your income and expenses.

There are free online budgeting tools that can assist with this. Professional financial planners can also offer guidance on long-term planning.

Creating a realistic budget helps you identify unnecessary spending and prioritise essential expenses.

Restructuring debt with your credit providers

If you’re overwhelmed with debt, contact your lender to discuss your options. Most are open to working with clients experiencing financial difficulties – especially if those clients reach out early on.

Common options include:

• Renegotiating terms. Ask your lender if you can adjust your repayment schedule or loan terms to make payments more manageable.
• Lower instalments. Request a temporary or permanent reduction in your monthly instalments to ease cash-flow pressure.
• Hardship arrangements. Many banks and credit providers offer formal arrangements for financial hardships, including payment holidays or tailored repayment plans to help clients.

Debt counselling as a legal, protected solution

In South Africa, debt counselling is a formal process regulated by the National Credit Act. It provides an effective solution for individuals who are overindebted – whose debts and living expenses exceed their income.

A registered debt counsellor can take several steps to ease your financial pressures.

These include:

• Negotiating with your creditors on your behalf
• Restructuring your debts and drawing up a manageable repayment plan
• Protecting you against legal action by your creditors

Debt counselling is a transparent, legal approach that protects your consumer rights and helps many people reduce debt for good. This structured, protected debt solution can provide peace of mind during a difficult time.

Did you know debt counselling can help you unlock cash while protecting your assets?

What to do if you are already caught in informal lending

If you’ve already borrowed from informal or predatory lenders, it’s important to take immediate, safe steps to protect yourself and regain control of your finances:

Stop borrowing more

The first step is to stop borrowing. Taking out more loans will worsen your debt cycle and increase the risk of falling into dangerous repayment traps.

Do not hand over personal documents

Some lenders pressure borrowers to hand over their ID, bank cards, SASSA cards, or personal information as “security”. This is illegal – and there’s a high risk that lenders will misuse these items or commit fraud.

Report the lender to your nearest police station, as well as the National Credit Regulator (NCR), since confiscating these documents is a criminal offence.

Call the NCR on 0860 627 627 or email info@ncr.org.za or complaints@ncr.org.za.

Speak to a debt counsellor

If your lender has trapped you in unsustainable debt, reach out for professional guidance.

DebtBusters can determine whether you qualify for regulated debt counselling, and if so, walk you through the process with compassion and understanding.

Get professional support

Resorting to stop-gap measures to survive from month to month could be indicative of a deeper debt problem.

Acting quickly can prevent harassment, illegal practices, and further financial harm.

DebtBusters provides a free, confidential debt assessment to understand your financial situation and recommend the best solution for you.

Don’t wait until your situation worsens. Contact DebtBusters today for a free callback and debt assessment.

FAQs about informal lending

Is informal lending illegal in South Africa?

Yes, informal lending is illegal under the National Credit Act. Illegal lenders operate outside formal regulation and evade legal lending requirements. These unregistered lenders are not subject to interest rate caps, affordability assessments, or consumer protections, and can charge exorbitant rates while engaging in unlawful practices. 

Can a loan shark take you to court?

In theory, an unregistered lender might attempt to take action in the Small Claims Court to recover money; however, because the underlying agreement is unlawful, they typically cannot legally claim interest or enforce the loan in the same manner as a registered credit provider.

Unregistered loan sharks often lack the legal grounding to pursue debts in court and, even if they try, their claims may not be enforceable. Seek legal advice from law clinics if you are served with court papers.

Can debt counselling help with informal debt?

Traditional debt counselling under South African law is a structured process for managing and restructuring formal credit agreements that are subject to the National Credit Act (such as credit cards, personal loans, overdrafts, and store accounts).

However, informal loans from unregistered lenders cannot be included in the legal debt counselling process because they are not recognised under the Act.

If you are overindebted and have both formal and informal debts, a debt counsellor can help you manage your formal debts, improve your overall financial situation, and offer you guidance on addressing informal obligations safely.

How do I know if a lender is NCR-registered?

Legitimate money‑lending businesses in South Africa must be registered with the National Credit Regulator (NCR). You can:

• Ask to see their NCR registration certificate and unique NCR number
• Confirm this on the NCR’s online public register
• Contact the NCR directly to confirm their status

Explore more Frequently Asked Questions (FAQs) on the DebtBusters platform.