Personal-Finance

How to identify a loan scam and 4 other readers’ questions answered

2018-12-11 06:00

If you have questions about credit, you’ve come to the right place.

1. Why do I have to cancel my existing bond to buy another house?

Q: I had a paid-up property and kept the bond “open” just in case I needed money for an extension or for my son who is at university. I purchased a new house and the bond originator helped me get a bond from a bank. However, the bank demanded a cancellation of the bond on my other property before they could register the new bond. Why is that?

A: Although you may not currently be using your access bond, it remains a line of credit and is taken into consideration in the case of an affordability assessment. The bank will consider whether or not you can afford two bonds. If not, you will have to cancel one. This is important when it comes to any credit lines. While having credit available and not maximising it may reflect positively on your credit record, access to too much credit could affect your ability to open new credit lines.

2. What are the pros and cons of debt review?

Q: I want to know the advantages and disadvantages of being under debt review. Is it possible to ask my debtors to reduce the interest rate on my loans so that I’m able to pay it off by myself?

A: Debt review, done correctly, is a very powerful tool. Only if you are under debt review can you get a discount on the interest rate you pay under the debt counselling rules system. This is an agreement that credit providers have reached as part of the debt review process. They want to know that they are being treated fairly and that all other credit providers are providing a similar discount. With the benefit of paying less on your total loan, the only disadvantage is that you cannot access credit until you are finished with debt review. This means you must first pay off the debts you have incurred. This is to protect both the consumer from falling back into a cycle of debt and to ensure that the consumer does not become overindebted and is unable to pay the existing loans. Learning to live without access to credit is a good discipline.

3. What does it cost to cancel debt review?

Q: What happens when you cancel debt review? Do you still have to pay for a lawyer?

A: If you have settled all your debts, then you can get a letter from your debt counsellor and the debt review is terminated. However, if you wish to cancel the debt review before your debts are finalised, you can only do so if you are able to prove affordability and that you can meet the repayments. You have to go to court to cancel the debt review. That means you have to hire a lawyer, which costs in the region of R2 500 to R3 500. If the case is opposed and goes to the high court, that could set you back around R9 000. Russell Dickerson of RD Debt Counselling recommends you conduct a cost analysis first. If your debt review did not include a negotiation to reduce interest rates, there may be a financial argument to leave debt review as you will not be paying a debt review fee. However, you also need to take the legal fees into consideration. If your debt review agreement qualified you for lower interest rates and the removal of the service fee, then it may not make sense to cancel the review. This is because the original interest rates will apply and your instalments will increase significantly. You will be paying more interest for no reason. Dickerson says if you are benefiting from a reduced interest rate and can afford to pay more than the court order each month, rather pay off the debt review in less time and still benefit from the lower interest rates. Dickerson says in his practice he encourages his clients to use any extra income to pay an additional amount into their assets such as a house and car. These do not have the same interest rate reduction under debt review as short-term, unsecured debt. “This is twofold, it gets them out of debt review more quickly, their assets are still protected and, if they have a hiccup, they are ahead on their payments.”

4. Is this a loan scam?

Q: I applied for a loan with a company and it has been approved. But now they say I must pay R4 999 upfront to secure the loan and that I only have to start paying instalments in August. Is this legit or a scam?

A: This appears to be a typical scam, where a fraudster pretends to be a credit provider (often using a name similar to an existing credit provider). They ask for money upfront, only to disappear once you’ve paid them. If you’re considering taking out a personal loan, please be careful when dealing with unregistered lenders.

According to the National Credit Regulator (NCR), look out for these warning signs: 

  • They ask for money upfront: The National Credit Act does not allow credit providers to request upfront payment for the release of personal loans. Consumers should not pay money before they are granted a personal loan;
  • No affordability or credit assessments are conducted: All credit providers are required to conduct affordability assessments and credit checks before granting loans. If the credit provider is bypassing this process, it should raise questions;
  • No orange sticker: You can make sure a credit provider is registered by seeing if they have a window decal (orange sticker on their window with the NCR logo), or a registration certificate at their business which has the NCR logo and the NCR credit provider number. You can check if the credit provider appears on the NCR’s website, which carries a list of all registered credit providers, including lapsed and cancelled ones; and
  • They use a foreign domain: For online credit providers, consumers should be wary of those using websites or emails with internet domains such as yahoo.com, webmail.co.za, co.uk, admin.in.th and manager.in.th. If you are in doubt about the legitimacy of a credit provider, contact the NCR on 0860 627 627 or www.ncr.org.za

5. How do I become credit worthy?

Q: I would like to know how to become credit worthy again. I was placed under an administration order. I have approached some service providers to rescind, but to no avail, and I currently cannot open an account any more. I am working but cannot make ends meet with my salary. 

A: There are three aspects to this financial situation: how to improve your credit score; how to rescind an administration order and, finally, whether more credit is a solution. 

Credit bureau Compuscan provides the following tips: 

1. How to improve your credit score 

  • Work according to your budget and within your means when purchasing on credit. 
  • Ask the credit provider (when applying for credit) to show you how much you will pay every month, to prevent overindebtedness. 
  • Pay all instalments on or before the due date. 
  • The higher your utilisation, the more your credit score will be negatively affected. 
  • Work towards having a good mix of accounts on your profile. Different types of accounts hold different scoring weights. You will improve your score more if you can show good repayment behaviour on a secured account (such as a home loan or car finance) rather than on an unsecured account. It also counts in your favour if you have revolving credit, for example a credit card or a store card. However, your repayment behaviour is much more important than the type of accounts you have and you should not open accounts just to try and improve your credit score. 
  • The score also looks at your number of recently opened accounts. If you open new accounts one after the other within a short period of time, your score will be affected negatively. 
  • Another factor is the length of time of good repayment behaviour. Making regular payments over an extended period of time will result in your score improving. 
  • Try not to rely too regularly on payday loans. This too creates the impression that you are reliant on credit to survive and this poses a risk to lenders. 
  • Talk to your credit provider if you are unable to make a payment due to unforeseen circumstances, to see if an alternative repayment agreement can be reached. 
  • Never ignore a letter of demand for payment or a summons to court for non-payment. 

2. How to rescind an administration order

Removing the order will definitely have a positive effect on the consumer’s creditworthiness but will have no effect on their credit score as it’s not taken into consideration. It is also illegal to apply for credit while under administration. The administration order can be removed from the profile under the following circumstances: 

  • All listed creditors have been paid and the administrator has lodged a section 74U certificate, whereafter the order lapses. 
  • The order is rescinded in terms of section 74Q, which can include an application that a consumer’s finances have improved sufficiently. 
  • The order reaches its five-year retention period on the bureau, which is calculated from the date on which the order was issued by the court. If a consumer wants to approach lenders to rescind their administration order, it is advised that they approach their administrators (the firm that manages the administration) to be present. 

3. Taking on credit to make ends meet 

It would not be advisable to apply for additional credit as the consumer will not be able to afford the repayments of their credit commitments. The consequence of not being able to afford the repayments can lead to the consumer becoming over-indebted or the situation in which they are unable to meet the requirements to get access to further credit due to a low credit score. 

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January 20 2019