Simply put, because there is no other process that works as well and involves a really simple quid pro quo; if the consumer repays every cent they have borrowed, the industry will reward the consumer not only with certain interest rate and fee concessions, but also with a clean credit record and complete financial wellness.
Let’s firstly look at it from the Credit provider’s point of view. We have all heard of toxic debt, a phrase that has become a household buzzword for the first time during the start of the economic crisis. The banking industry in South Africa finances the money it lends out in 3 ways, through depositor’s via savings and investment accounts, from money it raises from securitisation and via the Reserve Bank. It is therefore naturally not the bank’s own money that is lent out. When borrowers therefore do not repay debt, whether it be on a home loan or unsecured debt and it is on a large enough scale to have the potential to erode the returns on an investment or pension fund, it becomes toxic and effectively infects other industries like the pension fund industry in this case. By ensuring that there is enough incentive for consumers to repay debt, it therefore also protects those consumers that are investors or savers.
From the consumer’s point of view it makes as much sense. Before the advent of the National Credit Act of 2005, there was no consumer protection legislation to assist consumers who were over-indebted. In fact, besides for weathering the impending legal action on overdue accounts one of the few solutions to reduce the amount one paid to credit each month was via a consolidation loan. This effectively took short term credit and both extended the term and increased the interest rate which has a disastrous effect on the consumer. It is not uncommon to see these consolidation loans costing the consumer as much as the initial loan. So as a consumer, expect to pay back more than you borrowed in interest and fees alone, never mind the new initiation fees and industry credit life insurance.
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