It is very clear that the current COVID-19 pandemic has affected many households’ income. Regardless of the call to re-open the economy, many businesses are uncertain about how their operations and activities are going to resume.
The labour market is dazed as the wave of unemployment continues to submerge several people at a much faster rate. These uncertain times have left many desiring and seeking for help where they can — including applying for loans or credit that they cannot afford to repay.
There are so-called “emergency loans” that the banks are currently offering, beside the payment holiday relief (which I previously mentioned was a terrible idea for someone who can still afford to pay his current debt obligation).
These emergency loans are intended to cover the consumers monthly obligations such as their monthly debt repayment or household bills for a period of 3 months. The consumer will then only start making their first repayment after 3 months of taking the loan. Surprisingly, This practice seems to be similar to what we saw during the 2008 economic crisis, caused by the housing market. Banks were lending to financially distressed customers at a disproportionate rate.
Now, the word “emergency” is applied next to the word “loan” which demonstrates the marketing strategy banks and other lenders are trying to apply to lure more clients into this blind scheme. The fact is that many consumers are distressed because they have either no income or reduced income. Such loans may seem to provide a form of relief, however they only snatch away consumers’ future earnings and savings. This in fact locks them into a debt trap that they will eventually find hard to climb out of.
Though the National Credit Act makes mention of what constitutes an emergency loan in Section 1 and Section 78(2) and Regulations 23 of the NCA, it is still import for consumers to understand that these are not the times to make irrational decisions, as the real storm is still to come.
According to the National Credit Act, Section 78 (2) of the NCA, a credit provider must report all emergency loans granted to the NCR in the prescribed manner and form.
An emergency loan is defined in section 1 of the NCA as:
“a credit agreement entered into by a consumer to finance costs arising from or associated with-
a. death, illness, or medical condition.
b. unexpected loss or interruption of income; or
c. catastrophic loss of or damage to home or property due to fire, theft, or natural disaster,
affecting the consumer, a person who is dependent upon the consumer or a person for whom the consumer is financially responsible.”
What could effectively work for financially distressed consumers?
It is important to note that the NCA does make provision for any over-indebted consumer to apply for debt counselling. You would need to do research on debt counselling and carefully contact a reputable debt counselling firm to restructure your debts and ensure that the repayment is more affordable. This is a great precaution as at the same time, the financial crisis is looming on the horizon.
Re-evaluate your budget
The other aspect will be to review your budget as this is often an effective solution. There are plenty of online applications to use to build a personalised budget. This gives you a broader view of what you could do differently and how you can prioritize your costs during these critical times. It is always irrational to borrow money without a clear plan, and worst of all, to borrow a “bad” debt to cover personal expenses or bills.
Create other income streams
Consider creating additional forms of income. Many have diversified their interests into markets which are currently generating income during this lockdown period. This has yielded great return for many, either as a form of investment or as an additional form of income. There are firms hiring people with specific skills. There are online platforms which can be used to trade or sell items currently in need. Times like this require forward thinking and innovation.
The concerning factor is that the banks are getting consumers to spend their future money today, by taking unwanted credit out of fear of the unknown. The cost of making such an irrational decision is that you will find yourself repaying more on interest rates once the interest rates shoot back up. This will in turn affect your future earnings. Bear in mind that these loans provided by the banks do not have a fixed interest rates and are compounded yearly.
There will not be another better time to make critical decisions such as this; being savvy is key. The reduction in the repo rate should not be an opportunity to swim into more debts, but an opportunity to settle your debts with the surplus now available. Pay off the debts with the highest interest rates, as the interest factor is reduced. This reduction in repo rate is an opportunity to clear your debts and save as much as you can.
The key thing to remember is to be savvy and frugal, just like a smart ant during summer saves enough stock for winter.
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