What is debt?

This is the second in a series on debt and how it can effect you. The previous post dealt with SA’s junk status and can be read here.

In its broadest sense, the idea of a “debt” refers to an obligation to do something, whether by payment or by the delivery of goods and services, or not to do something.  For the purposes of this series, we will focus only on the obligation to repay money.

South Africans are no strangers to borrowing money.  In 2014, the World Bank Findex reported that a higher percentage of people in South African borrowed money than in any other country in the world.[i]  “Borrowing” could mean borrowing from financial institutions, from friends and family, from stores (buying on credit) and from private informal lenders.  These are all types of debt.

Whatever the case may be, if you have debt, or are thinking of borrowing money, there are some important things you need to consider:

  1. Whether the debt will be secured or unsecured;
  2. What your interest rate will be; and
  3. How many repayments you will be required to make.

In this post we will discuss some of the common types of debt and what makes them different from one another.

Common types of debt

Secured versus unsecured debt

Secured debt is when the person you borrow money from has some sort of claim to your assets if you don’t pay them back.[ii]  Home loans are a good example of secured debt.  On the other hand, unsecured debt is debt without any collateral or security.  A personal loan from a bank is unsecured.  Because secured debt is less risky, lenders will usually offer better interest rates for secured debt compared to unsecured debt.

Home loans

For many people, buying a home or land is the largest financial investment they will make over the course of their lives.  A home loan is a loan given by a financial institution for the purchase of a house. They will give you enough money to buy the house today, if you agree to pay off the loan with interest in small amounts over a number of years.  As it is such a large amount of money, the financial institution will usually require that the loan be secured by a mortgage bond over the property.  This means that your house is the collateral for the loan, and can be seized by the bank if you fail to pay your debt.

What is a mortgage bond?

A mortgage bond is a legal instrument which is registered against the title deed of immovable property.  It gives the bond holder something called a “real right” over your property.  This prevents the owner of the property from selling the property without the permission of the bond holder, and allows the bond holder to sell the property if the owner fails to pay their home loan repayments, as agreed.

A bond comes into being when you sign bond documents with the bank or the bank’s attorneys.  On a practical level, it is a note on the Deeds Office records that someone else has a real right over your property.

Car finance

You can finance your car through a financial institution in one of two ways: an instalment sale agreement, or a lease sale agreement.  In both cases, the bank will own the car until you pay off the loan. Once you have made all the payments on an instalment sale agreement, you become the owner of the car.  In the case of a lease sale agreement, you get the option to buy the car once the agreement has run its course.

You should always be wary of the fact that cars lose value over time.  So, if you buy a car and need to sell it in a year’s time because you can no longer afford the repayments, it is possible that you won’t make enough money from the sale to repay everything you owe.

Personal Loans

A personal loan isn’t secured against anything you own. Unsecured loans are riskier than secured loans because it is less certain that the lender will get their money back if you fail to pay the loan repayments. To cover the risk, the lender will usually require a higher interest rate.  Where you might get a home loan at 2% “above prime”, you could get a personal loan at anything from 5% to 20% above prime. In real monetary terms, that means you are paying a lot more for the debt.

Although it is a riskier form of debt, this does not mean that the lender can’t get their money back.  A lender will still be able to enforce the agreement through the courts and the mechanisms in the National Credit Act 34 of 2005.

Payments by monthly instalments

Think of all of those adverts you see which tell you that you have the choice of paying for a product today, or paying a number of smaller payments over a number of months (TVs, furniture and cell phone contracts). If you choose to pay off the item over a number of months, you will have a contractual obligation to make those payments and, if you default, the store that you bought the item from will be able to take legal action against you for breaching that contractual obligation.  This could involve reclaiming the item, cancelling the contract, and/or claiming damages against you.  You will usually end up spending much more for the product than you would have if you had saved up and bought it cash.

Private informal lenders

Borrowing from informal lenders is common in South Africa.[iii]  Private informal lenders are unregulated and, as such, may charge much higher interest than formal lenders. If you are borrowing informally, make sure that you know what interest will be expected from you.  Be careful of lenders that don’t agree to repayment terms and interest up front, as you could end up repaying many times what you borrowed.

Debt traps

A debt trap is the term used to describe a situation where a person has debt that is extremely difficult or impossible to repay.  One of the ways in which you can fall into a debt trap is when you start borrowing from other institutions, or from informal lenders, to repay the debt you currently have.  It becomes a downward spiral when the new debt is on worse terms (higher interest) than the old debt. The further into debt you get, the closer you get to being blacklisted, declared insolvent and having your assets sold to repay your creditors.

Good debt management

Debt can be a very useful tool for buying assets or financing your dreams, but it can also be a quick way to lose a lot of the things you have worked so hard for.  Being aware of how debt works and how to manage it is crucial if you are going to rely on debt to help you to reach your goals.

When you take out debt, remember that interest is the cost of that debt.  The higher your interest rate, the more you are spending to get debt. The lower your interest, the cheaper your debt – always aim to get the lowest interest rate you can. One of the ways that a financial institution will determine what your interest rate will be, is to consider your credit rating.  When you default on your payments (make late payments or no payment at all), your credit rating goes down. This will make your future debt more expensive and possibly lead to your eventual blacklisting. When you pay your debts according to the terms of your agreement, your credit rating improves. The better your credit rating, the more likely you will be offered better interest rates in future – always try to stick to the terms of your contracts.

In our next part of this series, we will deal with the issue of interest rates and inflation and how this affects debt.

By: Alexander Ashton

Alexandra Ashton is an attorney heading up the LRC Johannesburg debt and housing department. She holds a BCom and an LLB with distinction from Wits University. 

Alex, with thanks to the continued financial support of Legal Aid South Africa, is currently working on assisting people who lost their homes as a result of the fraudulent Brusson Finance lending scheme to be restored ownership of their properties.

Disclaimer: The opinions expressed by the Realising Rights bloggers and those providing comments are theirs alone, and do not reflect the opinions of the Legal Resources Centre. The Legal Resources Centre is not responsible for the accuracy of any of the information supplied by the bloggers.

[i] According to the World Bank, Global Findex Data Bank, (available at: Databank.worldbank.org/data/reports.aspx?source=1228) 85.6% of South Africans had borrowed money in the year leading up to the report compared to the global average of 42%.  See also Demirguc-Kunt et al, “The Global Findex Database 2014: Measuring Financial Inclusion around the World” at page 7 available at: http://www.worldbank.org/en/programs/globalfindex.

[ii] A secured loan is defined in the National Credit Act No.34 of 2005 as “an agreement, irrespective of its form . . . in terms of which a person advances money or grants credit to another, and retains, or receives a pledge to any movable property or other thing of value as security for all amounts due under that agreement”.

[iii] The 2014 World Bank Findex Data Bank recorded that 10.9% of South Africans have borrowed from informal lenders.

How the ratings downgrade affects your debt: a legal perspective

[Featured image sourced from BusinessTech]

As of today, 07 April 2017, both Standard and Poor’s (S&P) and Fitch, two of the three international ratings agencies alongside Moody’s, have downgraded South Africa’s credit rating to sub-investment grade, or “junk status”. There has been a lot of discussion about how this could affect the exchange rate, international investment, taxes and government spending. But how does it affect the average person and what, from a legal standpoint, should you be aware of?

Before we start, it is important to note that there is no need to panic. Economic changes don’t usually happen too drastically, or overnight. Nonetheless, there are things that you should do to prepare yourself so that you are not caught financially off-guard by changes as they happen.

So what can the average person expect? The average person could be affected in five ways: taxes may increase, interest rates may increase, inflation may increase, job security may decrease and returns on your pension, provident and retirement funds will probably decrease. What this boils down to is more pressure on your pocket. That pressure will make it harder to save, invest, and – more critically – make it harder to repay debt and cover your day-to-day expenses. In this post we are going to focus on what happens when you can’t pay back your debt.

First of all, what is debt? Debt is when you have effectively borrowed someone else’s money that you need to pay back. Debt can take a number of forms. Home loans, vehicle finance, credit card debt, personal loans, store cards, cell phone contracts, and instalment sales are all forms of debt. With the pressure of interest rate increases and rising costs of expenses, it becomes harder to make your monthly repayments. If you don’t or can’t pay your monthly instalments, your credit provider can take a number of legal steps against you depending on you contract with them and the nature of the debt.

Ultimately, the law recognises a creditor’s right to be paid for what they have lent you. So if you stop paying, you don’t simply get to walk away without repercussions The law provides a number of ways for creditors to get their money back. Ultimately, each way puts your belongings and, sometimes, your livelihood and home at risk. Common legal routes to recoup unpaid debt are as follows:

  • Bonds over your immovable property (mortgage bonds) allow credit providers to sell off that immovable property to repay themselves. You might have a home loan secured by a mortgage bond over your house for instance.  If you default, the bond would allow the bank to sell your home.
  • Writs of execution allow creditors to sell your movable property (for example your car or furniture), and or your immovable property to pay themselves back.
  • Garnishee orders / emolument attachment orders allow a creditor to deduct money straight off your salary.
  • Orders of insolvency allow creditors to sell off your assets to repay themselves.

Over and above all of this, defaulting means that you run the risk of being black listed. If you are black listed you won’t be able to get credit in future. If you avoid black listing, you may run the risk of having your own personal credit rating downgraded. Just like the S&P downgrade, this will make credit institutions less inclined to lend you money, and if they are willing to lend you money, it will more than likely be at interest higher rates.

So basically, you need to avoid defaulting on your debt.

What you as a consumer and a debt holder can do to avoid default is to first and foremost “know your debt”. In other words, know exactly how much you have borrowed, and exactly how much you have to pay back on a monthly basis.

Secondly, “know your interest rates”. You need to know which of your interest rates are flexible and take steps to understand what an increase in the repo rate will mean for each of your repayments. Most debt is granted on a flexible interest rate. What this means is that if the reserve bank chooses to increase the repo or “prime” lending rate (which is likely to happen following a downgrade) your interest rate will also be increased.

Thirdly, “have a plan to reduce your debt”. Have a plan of how you are going to repay your debt. The best place to start to reduce debt is try to reduce your expenses and to use any extra money you have – after paying off your monthly repayments – to pay off your debt starting with the debt with highest interest rate.

Fourth, “try to avoid more debt”. Particularly avoid debt on medium-sized purchases and purchases you don’t need. That new TV may only cost you “R199 per month!!!” But that is adding to your debt burden, your risk of default, and usually, you will end up paying more for that TV over the long run than you will if you save up and buy it in a lump sum. Yes, this means you may not have as many nice things. But if interest rates increase you will be grateful that you are not drowning in debt.

Fifth, “downsize if necessary”. Do you really need that expensive car, that expensive house, or that fancy cellphone? Think about going simpler, smaller and cheaper. When it comes to debt, every little bit counts.

I hope this basic overview has been helpful. Over the weeks to come, we are going to run a number of articles on our “Realising Rights blog” to unpack the concepts set out in this article with the aim of helping you take control of your debt.

By Alexandra Ashton

Alexandra Ashton is an attorney heading up the LRC Johannesburg’s debt and housing department. She holds a BCom and an LLB with distinction from Wits.

Alex, with thanks to the continued financial support of Legal Aid South Africa, is currently working on assisting people who lost their homes as a result of the fraudulent Brusson Finance lending scheme to be restored with ownership of their properties.

Disclaimer: The opinions expressed by the Realising Rights bloggers and those providing comments are theirs alone, and do not reflect the opinions of the Legal Resources Centre. The Legal Resources Centre is not responsible for the accuracy of any of the information supplied by the bloggers.

Powerful powerlessness and what I learnt about leadership

On Friday, 17 August 2012, I attended what was essentially an opportunity to celebrate the work of Ruth First, but also a colloquium on inequality, where I expected to walk away with a better understanding of and answer to what is considered to be South Africa’s foremost challenge. Instead, I felt that the speakers were finding it difficult to address the topic of inequality within the framework of Ruth First’s writings, as well as addressing the subtheme to which they were allocated.

At the same time, flickering amongst the audience, some of whom were glued to their mobile phones, was an awful awareness that South Africa had just been witness to a national tragedy. A level of outrage about the Lonmin mines killings was voiced by some of the commentators and some of the speakers themselves condemned the shootings. Some asked what Ruth First would have said, but the answer is difficult to know. Some speakers tried to voice an opinion on what Ruth First would have thought of democratic South Africa in general, but twitter followers berated such attempts.

However, the more I learnt about the former activist and journalist, the more I wished to have grown up during a time when I may have been intimately influenced by her thinking and her work. Learning more about Ruth First made me realise the dearth of people like her that currently exist in South Africa. It was apt them that the issue of leadership arose, as well as the question of, “who has the power?” The issue was also raised about critical journalism and learning from the past. All of these topics are central to the tragedy which permeated the room. The questions which have arisen in the media since the Lonmin killings are questions of power, leadership and accountability. Perhaps the biggest question is “how could this happen and why wasn’t something done to prevent it?”

Speakers at the colloquium asked the bigger questions. Njabulo Ndebele struck at the heart of leadership shortages with his illuminating answers to why democratic South Africa has perpetuated all of those things which were fought against during the struggle. People fought against violence and racism; yet, both of these exist strongly today. He suggests that since 1994, no one has claimed the problems and embraced them as problems which they are responsible for by virtue of their office. None of these problems have been subjected to a visionary mandate; instead government has shown the people how to govern through demonstrations.

He asks why powerful people demonstrate when they have the power to change things, perpetuating what he calls a “powerful powerlessness”. The abandonment of the social vision and the lack of rationality within the public is leading us to become “victims of our own actions”. While this discussion does not immediately allow us insight into why inequality exists and what can be done about it, it does speak to accountability and the implications of non-rational leadership.

Joel Netshitenzhe and Kate Phillips explored inequality probingly, seeking answers to the problems which have more practical implications. Joel Netshitenzhe suggested that an activist state as an instrument of redistribution is necessary and that good quality public services can reduce non-economic inequality. Kate Phillips suggested that “right to work” programmes (public employment programmes), such as those found in India, can contribute to reduced inequality, at the same time that broader strategies are implemented; strategies which may take a while to show improvements. The importance of these public employment programmes is that it mobilises people within communities to undertake activities to improve their local environments.

A fascinating anti-neoliberal (or perhaps pro-socialist) theme ran through some of the discussions. It was even suggested that democratic South Africa was defeated by global capitalism. One audience member mentioned that alternatives are available in systems like solidarity economies and eco-socialism. But perhaps the raison d’etre for such a theme is to get the audience thinking about new ways of approaching the economic system and perhaps an attempt to find a solution to inequality which is slightly more radical. I accept such a point; considering how endemic and systemic inequality has become. Perhaps we need to start thinking in different ways about politics, the role of the state and our economic systems in order to really deal with inequality in a way which sees universal and powerful results.

While I don’t have the intellectual capacity or knowledge to make any further comments on this, the idea of “changing the whole” (my words) was interesting for me while considering further the reality of leadership of this country and the role models that currently exist. Maybe all it really takes to fight inequality is someone with vision, a powerful intellectual mind, who thinks less in dollars, than in humanist terms. A leader would accept responsibility for poor decisions and bad deeds and accept South Africa’s problems as their duty to overcome. More than that, it would take someone who is willing to apologise to the miners for what has happened and condemn the killings. While NGO’s mobilise around the tragedy, I ponder on the actions which government will take. I challenge them to lead. I challenge them to lead differently; to be diligent, forceful and visionary.

By: Claire Martens

Disclaimer: The opinions expressed by the Realising Rights bloggers and those providing comments are theirs alone, and do not reflect the opinions of the Legal Resources Centre. The Legal Resources Centre is not responsible for the accuracy of any of the information supplied by the bloggers.

Launch of the Investment Policy Framework for Sustainable Development

The latest Africa Economic Outlook has recently been released and shows growth trends in Africa to be encouraging. South Africa is certainly running with the pack in this regard. That South Africa is both a destination for investment, as well as a source of investment, formed part of the discussion about international investment trends during the Launch of the Investment Policy Framework for Sustainable Development, which took place at the Chalsty Centre, at the University of the Witwatersrand, on the 26 July 2012. Speakers were James Zhan from the United Nations Conference on Trade and Development (UNCTAD), Stephen Gelb, Professor of Economics at the University of Johannesburg and the South African Minister of Trade and Industry, Dr Rob Davies.

The fact that developing countries are now entering the investment sphere as potential investors, and the fact that sub-Saharan Africa is now a significant investment destination, shows that the South and East are becoming noteworthy economic players. What was most interesting about the discussion was the “new” role of government (which favours regulation and protectionism) and that fact that not all investment is good for a country. The example of Wallmart entering South Africa was briefly mentioned here. This suggests that if a government is given more of a role in regulating investment, then government has some responsibility in insuring that growth in a country is not contrary to the laws and principles, as well as other policies, which already exist in the respective country. In South Africa, the Constitution should play a central role in guiding the principles of investment, whilst economic targets like skills development, technological transfer and enterprise development, as suggested by Stephen Gelb, can be factored into any investment treaties.

But what is the role of the Investment Policy Framework for Sustainable Development? As Stephen Gelb noted, investment inputs and outputs in South Africa have always been measured within a short-term framework and have focussed too heavily on quantitative values, leading to unwarranted worries; some of which recently sparked debates about nationalisation. He was talking of the 2010 slump which saw our Foreign Direct Investment (FDI) drop by 70%. As he points out, we have recovered sufficiently now to understand that South Africa was not in the sort of danger which was predicted. For this reason, he feels that the Framework is necessary to guide our thinking, ensure that we understand long-term trends and locate our debates within the international sphere.

I was impressed by a number of aspects of the Framework. Firstly, the Framework contains a number of values and principles for investors and host countries; suggesting regulation, cooperation, fairness and inclusive growth and so on. Furthermore, the Framework introduces sustainable development thinking into policy. While a definition of sustainable development is not given, it does suggest that social and environmental concerns are flagged. The Framework is considered a guide, to be used voluntarily by governments when framing their investment policies, using the expertise and experience from a number of well-respected specialists; including Dr Rob Davies. Most importantly, the Framework is a living document for those who use it, inviting commentary and suggestions.

Going back to the Africa Economic Outlook, it is suggested that youth unemployment will lead to more instability in Africa; with poor quality education to blame for excluding the youth from economic opportunities. While education has the greatest share of our national budget, South African’s are well aware of its continued failings. Should it be then that Government looks at new ways to invest in education, youth development and employment – all of which is crucial for future generations.
What are your thoughts on the Investment Policy Framework for Sustainable Development? Do you agree that the state should play a more active role in the investment flows? What do you think should be the focus areas for investment?