The National Credit Act (NCA) introduced debt counselling as a formal debt relief measure whereby a debt counsellor determines whether a consumer is or unable to satisfy, in a timely manner, all the obligations under all the credit agreements to which the consumer is a party. One of the purposes of the Act is to promote responsible credit granting and avoid over-indebtedness.
Being under debt review can be a tumultuous journey, filled with financial uncertainties. However, if you find yourself in need of a loan during this phase, it is critical to understand that it is not possible to secure a loan while under debt review.
Understanding the Challenges
- Regulatory Restrictions: Being under debt review often signals to lenders that you may be a high-risk borrower, making them cautious. However, under the National Credit Act (NCA) Act No. 34 of 2005, applying for a debt consolidation loan while under debt review is deemed reckless lending. A credit agreement is reckless if the creditor fails to conduct a detailed financial assessment on behalf of the client and still offers them credit. It is a bad idea to apply for a debt consolidation loan for people under debt review.
- Limited Options: Traditional banks may be less willing to approve your loan, narrowing down your available options.
Why Loan Sharks are a Bad Idea
A loan shark is an individual or entity that offers unsecured loans at extremely high-interest rates to individuals. These lenders often operate outside of official banking or financial regulatory frameworks, leading to practices that may not be legal or ethical. Loan sharks are not registered with the National Credit Regulator (NCR). Loan sharks are known for using predatory tactics, and the loans they provide typically come with unclear or misleading terms and conditions. Borrowers may face harsh consequences, such as aggressive debt collection practices or threats, if they fail to repay the loan as per the lender's demands.
Risks Associated with Loan Sharks
- Financial Risk: Due to high interest rates and unfavourable terms, borrowers face significant financial risks, including the potential to fall deeper into debt.
- Security and Safety Risk: The aggressive collection tactics employed by loan sharks can pose risks to the borrower's personal safety and well-being.
- The Risk of Losing Your Assets: If you consider obtaining credit from a loan shark, it will put you in a much more difficult situation should you fail to honour the payments. Regrettably, due to ignorance, many people are still losing their homes, cars, furniture, hard-earned valuables, their salaries because of applying for a debt consolidation loan from loan sharks.
- Don't Trust Easy Credit: While these lenders may offer more flexibility and may be more willing to consider your application despite being under debt review, interest rates may be higher, and terms may not be as favourable due to the associated risks.Be cautious of predatory lenders and verify the legitimacy of the lending institutions and their offerings.
Important Points to Consider
- Interest Rates: Be mindful of high interest rates that often accompany loans targeted towards those under financial strain.
- Legitimacy: The lenders are not registered with the NCR and the loan products are likely not transparent and compliant with financial regulations.
- Long-term Impact: Consider the long-term implications on your financial health, and whether the loan aligns with your debt repayment strategy.
Here’s why obtaining a new loan during debt review is not permissible:
1. Legal Restrictions
The National Credit Act (NCA) prohibits consumers under debt review from incurring any further debts. This includes taking out new loans. The NCA also discourages reckless lending by credit providers and contractual defaults by consumers. However, many people are unaware of their consumer rights and how the Act protects them.
2. The Purpose of Debt Review
Debt review aims to help consumers regain financial stability. Taking on more debt would go against this objective, making it harder to achieve a stable financial position.
3. The Credit Provider's Perspective
Creditors are unlikely to approve a new loan to someone under debt review due to the increased risk of non-payment. If a credit provider is aware that a consumer is under debt review and has been officially declared as over-indebted, proceeding with a proposed credit agreement—which could exacerbate the consumer’s debt—would be categorised as a reckless lending practice.
A lending practice is deemed reckless if the credit provider, with the knowledge that the consumer lacks the financial capacity, still approves the credit. In cases of reckless lending, a court may rule that the imprudent credit provider must wait until all other debts have been settled before receiving any payment, or it might even decide to annul the debt altogether.
4. The Debt Counsellor's Role
A debt counsellor will advise against taking on additional credit to ensure that the consumer can successfully complete the debt review process and regain financial stability. See our detailed article on the role of an NCR-registered debt counsellor.
5. Negative Consequences
Attempting to take out a new loan while under debt review could jeopardize the process. It might lead to the cancellation of the debt review, leaving the consumer without the protection it offers against legal actions from creditors.
Loans for individuals under debt review come with their unique set of challenges and considerations. While there are avenues to explore, it is pivotal to approach them with caution and a comprehensive understanding of the implications involved. Knowledge is your ally in making empowered and insightful financial decisions that resonate with your journey towards financial stability and freedom.
Contact Debt Sage now to see how we can help you live a debt-free life!