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Responsible lending: What you need to know when taking up a loan
Finance

Responsible lending: What you need to know when taking up a loan

August 02, 2022
0

Have you ever taken on several loans involving too much financial responsibility so that you had trouble making monthly payments? ‘Bitten off more than you can chew’? This has the potential to be very upsetting and begins to dictate many aspects of your life.

This is when responsible lending comes into play. According to the regulations, the lender must make a substantial effort to ensure that a loan is actually a good option for you, because in some cases it simply isn’t. The core focus is on helping you reach financial security—that is, living comfortably while still paying your loan installments on time. In fact, it carries a double purpose: both to protect banking customers and to ensure the solvency of the credit institution.

Erastus Haihambo, Head of Nedloans says, “Nedbank Namibia strives to be a responsible lender, providing affordable loans while ensuring that Namibians do not fall into the debt trap unnecessarily. Financial ill-health from acute indebtedness is not only perceived as a financial issue but a public health issue as well. We are committed to operating within the prescribed market conduct regulations, even in the current tough economic environment.”

According to the Financial Stability Report of the Bank of Namibia, at the end of December 2021 the ratio of household debt to disposable income stood at 77.4% compared with 87.7% for the previous reporting year. This 10.3% improvement notwithstanding, the ratio remains unacceptably high.

According to Haihambo, customers’ access to financial education coupled with adherence to market conduct principles are key to reducing the high ratio of household debt to disposable income and Nedbank is striving to comply with progressive guidelines of the Regulator having proactively adopted market conduct-aligned business model and in partnership with Financial Literacy Initiative (FLI) availed the most comprehensive financial education booklet thus also collaborating to provide financial education to empower Namibian Consumers to make informed and smart money decisions.

Aside from the bank's requirements, clients should examine several crucial issues before incurring debt, such as: How much money should I request? We must carefully consider our true needs and not take on more debt than we can afford to repay. Not all debt is bad, however, having too much personal debt could be considered bad.

Then, Will I be able to make the installment payments if the interest rate goes up? When taking out a loan with a variable interest rate, it's possible that the interest rate may increase, so the increased payments will also make it more difficult to keep up with payments thereby posing a risk that a borrower will not be able to pay back the money borrowed. In addition, how soon will I be able to repay the loan? And is this is the best option for me? A crucial element is the loan period. If we take out a loan for something with a set lifespan—like a car—the loan's term should never be longer than the lifespan of the item.  Nedbank’s goal is to see to it that customers take Nedloans in a responsible way and avoid over-indebtedness.

“In this regard, Nedbank has proactively chosen to comply with the regulation prescribed under the Banks Act and has self-regulated its lending policy to protect customers. Our customers will come to realise that our product offering is one of the best on the market. By ‘over-indebtedness’ we refer to a situation where the customer struggles or fails to keep up with bills and other financial commitments, resulting in missed payments, contrary to the loan agreement,” explains Haihambo

Lending Policy Based On Principles

Lenders must follow lending guidelines, which span everything—from advertisements to loan agreements, from affordability assessments to limits on interest and fees. As ethical corporate citizens, banks must adhere to transparency requirements, and besides asking detailed questions about clients’ income, expenses, and current circumstances, they must help customers to understand what they are signing up to before you sign.

To this, Haihambo emphasizes, “Our lending policy is based on principles that follow the acceptable market conduct and is based on a business model that centres on consumer protection and fair treatment of clients. In addition, Nedloans considers the entire credit profile of a client and as such credit decisions are based on a full affordability assessment and not just on a partial credit appraisal based on the individual’s pay slip.”

Customised Loan Offering

Nedloans offers products across the spectrum of low-, middle- and higher-income earners.  Their clients include government employees, members of the private sector, and public sector companies, as well as regional and local authority institutions that have signed Payroll Deduction Agreements with Nedbank.

“Because we believe that irresponsible borrowing creates over-indebtedness and outweighs the benefit of the initial need for credit, our personal loan policy considers each customer’s unique circumstances, helping customers to meet emergency expenses to care for their families,” Haihambo added.

He also noted that Nedbank consolidates debts, thus providing immediate relief for an employee in financial distress and at the same time, allowing them to benefit from a lower overall interest rate.

Tips on Avoiding Over-Indebtedness

Haihambo says that by taking certain precautions—being aware of the risks and managing your budget carefully—you have every chance of never facing this situation.  He offers the following advice:

To control your budget and maintain your ability to pay and repay, it is essential to keep an eye on your finances.

Do not borrow excessively and always be reasonable: only take out loans that you can repay.

Start an emergency fund for unexpected expenses.

And lastly, compare prices when shopping, spend wisely and avoid buying on credit unless necessary. All in all, keep to good spending habits.

*Erastus Haihambo, Head of Nedloans

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