Q&A FORUM: The pros and cons of emergency loans
The loss of income due to lockdown is definitely seen as an “interruption of income”
Q: My wife and I both work in the hotel industry and since the end of March we have only received a third of our salaries. We are really stressing as our bills and accounts need to be paid. Our credit and store cards are all maxed out. We’ve been using them to buy food and other necessities. With our income to expense ratio, I don’t think we will qualify for a personal loan, but we've now heard about something called an emergency loan. We are really desperate but also don’t want to make our situation worse. Can you advise us on what an emergency loan is and what exactly it entails? – Dennis G
A: Sebastien Alexanderson, CEO of National Debt Advisors responds:
Firstly, know that you are not alone. Due to the loss of income caused by lockdown, many South Africans find themselves in the same situation. You are doing the right thing by gathering information before making financial decisions which can affect your future.
Emergency loans are completely legal. They are defined in section 1 of the National Credit Act (NCA) as a credit agreement entered into by you, the consumer to finance costs arising from or associated with:
- Death, illness or a medical condition;
- Unexpected loss of interruption of income; and
- Catastrophic loss of or damage to your home or property due to theft or natural disaster.
The loss of income due to lockdown is definitely seen as an “interruption of income” and provided all required documents are in order, you can apply for an emergency loan from your bank.
Your word that your income has been interrupted, won’t be enough. According to the National Credit Regulator (NCR), where you submit a declaration under oath as proof of the existence of the emergency, the declaration must clearly state the cause of the emergency, and whether the cause of the emergency is the unexpected loss or interruption of income. The declaration must also provide the details of your employer (for employed persons), or your business (for self-employed persons).
In terms of section 78 of the NCA, the over-indebted and reckless provisions of the NCA do not apply to an emergency loan. In other words, credit providers do not have to conduct an affordability assessment before the granting of an emergency loan.
This means you will have no recourse if and when you cannot repay the loan and you won't have the option of approaching a debt counsellor to investigate the validity of a reckless loan claim.
Banks and micro lenders are likely to adjust their score cards to allow a greater range of consumers to qualify for their products, while different banks will have different appetites and scoring requirements.
I am concerned that the banks are being given carte blanche to lend recklessly – and already cash-strapped consumers are going to struggle to make payment on loans which they could not afford in the first place.
Just like it is up to us to take responsibility for our physical health and the health of our families (and continue trying to stop the spread of Covid-19) we have the same responsibility towards our financial health.
Nonpayment and skipping of payments will ultimately negatively affect your credit score.
Find out exactly what the interest, terms and conditions of your emergency loan will be before signing for it.
* Send your questions to firstname.lastname@example.org