The dangers of informal lending

5 April 2019

In recent years the number of informal lending schemes in South Africa has grown significantly as people continue to look for new ways to access more money. But is this a reliable and safe way to take out a loan?

The term ‘informal lending’ is typically used to describe lending schemes or practices that are not regulated by a formal, registered and accredited financial institution such as a bank. These schemes often involve unsecured loans and have grown in popularity because they evade common affordability checks and processes, meaning they cater to the over-indebted.

For many the attraction lies in knowing they will probably be approved for a loan despite being over-indebted.

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

While some of these schemes are above board and safe there are others that are financially dangerous and here’s why:

1. You may not be able to make payments: If you are already in financial trouble and struggling to meet current debt obligations, the chances that you will be able to comfortably afford additional payments are slim. Not only will you be adding to your financial stress, but you’ll run the risk of falling behind on payments.

2. You could face expensive interest rates: Often these unsecured informal lending schemes have exorbitant interest rates that make repayments expensive. This is because the lender needs to recover the cost of the loan in a shorter period.

3. It may not be the solution you’re looking for: Struggling to meet debt repayments and feeling like you are drowning can be stressful to the point where you may seek other options such as lending informally. While this may fill a gap, it won’t enable you to better manage your debt.

Instead, you should be looking into smarter debt solutions such as debt counselling that aim to rehabilitate your finances. At DebtBusters, we specialise in helping you improve your financial situation so you’re able to enjoy a more secure financial future, with the long term goal of debt freedom and building your wealth firmly in place.

4. You may not be covered under debt counselling: Another pitfall of getting involved in informal lending is that if the lender or creditor is not accredited or registered with the National Credit Regulator, they are not protected under the National Credit Act and therefore cannot be included in the debt counselling process. This means that even if you do enlist in debt counselling, any informal lending credit agreements cannot be negotiated.

5. Unsavoury debt collection methods: Signing up for informal lending schemes opens you up to unregulated and potentially dangerous practice. This means that should you be unable to pay, you could find yourself in an unsavoury situation where the lender could threaten your safety and even your life upon non-payment.

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

If you find yourself in this boat, contact DebtBusters today for a free debt assessment.