How to manage credit while interest rates are lower

Lowered interest rates have helped many South Africans face the challenge of a loss of income while still needing to keep up their repayments on their home, vehicle and personal loans and other credit agreements. 

But while lower interest rates offer short-term assistance by reducing loan repayments, cheaper credit can also be a risky temptation. Buli Ndlovu, executive: retail and business banking marketing at Nedbank, says it’s important for consumers and financial institutions to be responsible in the way they use credit in the coming months and years. 

“Covid-19 response strategies have driven down interest and inflation rates,” she says, “but this situation is unlikely to last for long and consumers may soon find themselves having to pay back more on their loans as interest rates are increased again.” 

Responsible lending is a commitment by a financial institution to lend only an amount of money to its clients that it’s confident they will be able to repay, without getting into financial difficulties in the longer term – especially if interest rates go up. 

“A responsible lender will make sure its clients can afford their loans or credit facilities before granting them, protecting their clients from any risk of financial hardship down the line.”

While these responsible lending practices protect the consumer, many people don’t understand this and see them as an attempt by the bank to refuse to give them a loan or give them less credit than they actually want. 

It’s not just the role of the bank to be responsible when it comes to loans or credit; consumers need to be more responsible borrowers.

“The best way to do this is to be more diligent in managing your expenses and not be tempted into taking too much credit or accepting expensive loan products just because they are offered to you and seem appealing in the current low interest-rate environment," says Ndlovu.

The financial challenges and high amounts of debt caused by Covid-19 and lockdown can make it tempting to take whatever credit is offered to you right now. But Ndlovu advises anyone who is worried about having a lot of debt to consider alternative solutions, such as a debt consolidation loan from a reputable bank. 

“It may seem contradictory to be taking out another loan, but a debt consolidation loan can be one of the most effective solutions for anyone struggling to meet their debt repayments. If that loan is provided by a responsible lender, such as Nedbank, it will be structured to help the person pay less every month to cover all their debt obligations, and possibly even pay off the total amount of debt they owe in a much shorter time – both of which are responsible lending principles.”  

Even before Covid-19, South Africans were struggling with high amounts of debt, with some estimating that at the end of 2019 we owed a combined amount of around R1.9-trillion. With most people (about 80% according to TransUnion) finding that their income has taken a knock in the pandemic, the temptation to turn to whatever credit is available just to make ends meet is stronger than ever. 

“It’s never been more important for banks and consumers to remain responsible in their lending and borrowing. This is to protect people from financial hardship when interest rates go up, and ensure that when our economy starts to grow again, as many South Africans as possible are in a good financial position to be able to benefit from it.”

This article was paid for by Nedbank.