Understanding credit and qualifying for credit

Head of Collections and ECM Strategy at Old Mutual Finance, Senzo Lubisi speaks to Motheo Khoaripe about the Credit. What is credit? What is the cost of credit?

Transcript

Motheo Khoaripe 00:00

There are about 20 million debt active people in South Africa. That's a lot, around half of the working age population in the country. What's more alarming is that the middle class is now paying around 80% of their net take -home pay on servicing debt. Now this means the average debt active person in South Africa is paying more than half of their monthly income on servicing their debt. Now that may be very concerning but there are some solutions to managing your money. Welcome to the old mutual financial literacy podcast series. I'm your host, Mattel Horibe. On this podcast series, we'll be getting experts to answer some of your burning questions when it comes to managing your finances. It's an easy money conversation that's meant to assist you to manage your money. From covering a debt, budgeting, saving for a rainy day and your financial cover. In this episode, we talk debt and credit collections with Senzo Lubisi, the head of collections and ECM strategy at Old Mutual Finance. Join us, let's talk about money. Senzo, welcome to the old mutual financial literacy podcast series. Can you please just let us know what your work is about at Old Mutual and what do you do exactly?

Senzo Lubisi 01:14

Thanks Motheo, very good morning and thank you for having me. My name is Senzo Lubisi and I'm the head of collections and limit management strategy with Old mutual finance. I have more than 15 years’ experience in the credit and financial services industry. However, I've been at old mutual finance for two years. My core responsibilities include a collection strategy where we design strategies that help customers to avoid falling into financial difficulties. We call this our prevention methodologies when an account is up to date, where we encourage customers to reach out to us whenever they fall into financial difficulties. But when they do, it's all about how quick we can guide and assist customers to restore in a good standing. Also, I look after the limit management strategy, where we design tools that guide which segments of our customers can have access to additional funds, depending on their affordability such as limiting access to additional funds when customers are struggling to make repayments on their original installments.

Other functions include pay date management, where we focus on employer confirmation before a loan is dispatched or issued to customers as well as confirmation of salary dates to ensure alignment between when employers release salaries and debit or strike dates.

Motheo Khoaripe 02:43

So you're the all -around debt and credit guy then at Old Mutual. Happy to have you with us to hold our hand as we manage our finances. I want to start at the beginning, Senzo, when we look at debt and credit collections. Let's start with credit. What is it? What is that agreement when we talk about credit?

Senzo Lubisi 03:01

Credit commonly refers to a contractual agreement in which a borrower receives a sum of money of value and commits to repaying the lender at a later date typically with interest and fees so basically that's what credit is.

Motheo Khoaripe 03:18

And what would qualify me to be part of this agreement with a credit provider?

Senzo Lubisi 03:23

First and foremost is how you've been conducting your accounts elsewhere. If you already have a credit product with another credit provider, the repayments that is expected on a monthly basis, have you been servicing your debt according to the contractual obligation at the beginning of the contract, but you have your first time applicants as well which we call thin file because we don't have information, they would look at affordability and also affect us as have you been shopping around for additional credit elsewhere because that informs the appetite of customers in terms of are they seeking for additional credit, can they avoid it, etc. But fundamentally also the literacy around credit, why are we looking for credit? As a responsible lender, we delve into understanding the requirements from customers why they're looking for credit at the first place.

Motheo Khoaripe 04:20

I like that you touched on first -time applicants. Why is credit important? When you look at a customer's profile, are you looking at the fact that they've repaid something before? And if they are a first-time applicant, how do you advise them in terms of their responsibility on taking on credit?

Senzo Lubisi 04:38

So it is very critical for customers to actually first understand the requirement why they're looking for credit because depending on spending behavior from customers their different needs where customers would be looking for credit. But building and maintaining a healthy credit score and history is very important because the quality of your credit can have a far-reaching effect on many aspects of your daily life.

In addition to lenders and credit card companies checking your credit, insurance companies, landlords, utility providers and even potential employers may check your credit before considering to hire you, more especially in the financial services industry because you would be handling a customer's money so the first thing that would be scrutinized is can you actually handle your own budget and credit so it is very important to maintain a healthy credit score.

Motheo Khoaripe 05:39

When looking at my profile, what does a credit provider look at in terms of my living expenses, how I'm managing my accounts and the salary that I get?

Senzo Lubisi 05:49

Yeah, we look at everything holistically because it's very important. Some customers may not be 100% honest because they would like to qualify. But then because we are guided by the national credit act and the credit regulator, we have to obtain all the relevant information beyond what customers put in the application form, i .e., you know, we are able to extract the Bureau report with the consent of a customer and get bank statements. And with that, we're able to collate all the installments from a Bureau perspective. So that will be from credit providers, insurance, etc. And then from the bank statement perspective, then it's your living expenses will be able to gauge, you know, how much you spend on transport, school fees, groceries, etc., and then be able to collect all that info to determine the net disposable income, which is your salary minus all of those expenses. And then based on that and the credit qualification, we will determine the offer if a customer qualifies.

Motheo Khoaripe 06:57

That's my responsibility there as a customer, isn't it? When I'm applying for credit to be very, very honest with the credit provider, how much I earn, what I'm paying towards what, but also just looking at how much am I able to afford in terms of the credit that I'm looking for. So what other responsibilities lie on me as a consumer looking for a loan?

Senzo Lubisi 07:19

a very good question Motheo. I mean the most critical one is to do your research first of all I mean there's a lot of credit providers out there offering the same product so you need to know what you're looking for and that particular product must be bespoke to your needs you know in terms of you know even the cost of credit how much interest will be charged on that product what is the term when you fall into financial difficulty what sort of relief options will be made available by the company but and it's very vital that customers have a clear objective and understanding regarding why they need credit you know we emphasize on that because when you scrutinize the need versus what you want to use the credit for then it lies the answers where do you really need it because there is a cost associated with credit basically luckily enough based on the customer research that we've conducted the percentage of customers who would welcome financial education far outweigh

those who have received education in the past we're talking along the lines of 76% of customers so that's a really good number of customers raising their hands where we're looking for help actually around financial education basically and that's very very important aspect before you get into a credit agreement

Motheo Khoaripe 08:42

And that's exactly why we're here for that education from you, Senzo, when we look at interest charges. Now, in terms of credit, it can differ, right? It can be a credit card, it can be a loan for your mortgage when you want to get a house, or you want to invest in a motor vehicle to get you to and from home. Those are different. But I want you to deal with the interest charges. When we see the South African Reserve Bank Governor Lesetja Kganyago was standing up there with the Monetary Policy Committee talking about interest rates, what is he talking about, and how does that affect my repayment?

Senzo Lubisi 09:16

Before we go into the reserve bank, you know, adjusting interest rate, delve a little bit into explaining exactly what it is.

· So interest charges, this is the common component of the cost of credit, basically. Lenders charge interest on the borrowed amount and the rate can vary based on factors such as the type of loan,

· credit worthiness, because that talks to the type of customer in terms of risk, basically. And then they're

· prevailing market rates, you know, so there is obviously competition around credit providers in terms of what interest they can charge to their products in order to attract different segments of the market.

But typically, then when the SARB would adjust interest rate, a lot of credit providers, unless you fixed the interest, but the majority would use a variable interest rate, meaning when the South African Reserve Bank increases interest rates, it will also increase proportionately, the service providers will increase proportionately by the percentage that the Reserve Bank has increased the report rate. So it affects your repayment? Yes, correct, because banks or financial services providers borrow money from the Reserve Bank, you know, so that cost of borrowing, basically, is not only lended to a customer point of view, but the financial services providers have borrowed capital as well from the Reserve Bank or other banks, so that adjustment basically is aligned to, you know, the interest rate that is charged to customers. So whenever there's a 50 basis point increase, which is equivalent to 0 .5% from the South African Reserve Bank, then the credit service providers will also adjust the interest rate by the equivalent amount, which is 0 .5% as well.

Motheo Khoaripe 11:07

And it's almost immediate. Trust me, I've received that love letter from my bank the day after the Reserve Bank changes interest rates. What other charges should we be looking at when taking out credit? It's not just the interest rate we should be keeping our eye on, but there are other fees and charges.

Senzo Lubisi 11:24

on. So there are additional fees when you take on a credit product, namely fees and charges. And this refers to, a monthly service fee. It is the routine administration cost of maintaining a credit agreement. There's a lot of, you know, processes that takes place from an application of a credit product. So these fees basically are charged in order to offset those expenses by the service providers. And so essentially longer term generally results into higher overall costs because you will keep getting charged for on a monthly basis as long as the loan is still active basically.

Motheo Khoaripe 12:51

Let's talk then about those loan terms that you talk about. A lot of people feel taking out credit that they're signing their life away and they want to pay the debt as quickly as they can. But of course, that has some implications. If you take a shorter term, you could be charged higher. You could, in terms of interest rate, that is. And if you take out a longer term, you may be paying the loan over a longer period but be charged a bit of a smaller amount. Just explain how that works for us.

Senzo Lubisi 13:20

Okay good question and again it goes back to what do you need the loan for basically so that initial determination from a customer point of view a lot of customers are faced with unexpected life event such as you know a death in the family you know a spouse getting ill or getting retrenched you know and then you find that you know they just need to finance a specific event and then be able to repay it quicker and then go back into a good financial standing so I think that assessment what you require the debt for will now enable the customer to make an informed decision whether a shorter term loan versus a longer term shorter term loan if you have a life event and where the size of the loan is not excessive and then you can manage over a shorter period of time would be advisable because customers would be able to save a lot on interest and the fees but you on the other side you know if you wanted to ie finance you know installing solar at your house that cost 250 000 then that might actually take you longer because of you know the amount of installment expected which would be average seven to eight thousand basically over a period of five years so depending on the need but most importantly also

affordability then a customer would have to do some research and make an informed decision.

Motheo Khoaripe 14:46

Now I've often debated with my friends about having a plan B especially after taking out a loan. Like you say, a life event can happen, anything can happen, who then pays for the loan when you're either not there or maybe you've lost your job. So it's very important in terms of responsibilities as a customer to have some sort of buffer when things like that happen. What options do I have with my credit provider that they can offer me to make sure that I'm covered in that manner?

Senzo Lubisi 15:15

some customers may opt for what we call self-insurance like I'm going to save and then in the case of an unexpected life event then I'm gonna be able to finance but that's not always the case because we are faced with that an unexpected life event and then you withdraw the funds use them then customers will be left in a vulnerable state basically so the best way would be taking out a credit life insurance which covers customers in the event of unemployment, disability or death basically and this will ensure that should something happen that leaves a customer unable to earn an income such as retrenchment, unemployment, illness, disability or death you know the family won't be burdened with paying the debt basically instead the amount that is still owed will be settled by the life cover so that is the best effective way to cover for unexpected events.

Motheo Khoaripe 16:19

And is the credit life insurance figure also calculated into the loan I'm repaying? Was it a different amount?

Senzo Lubisi 16:26

Now it's included in the monthly instalment but shows as a separate line item on the loan statement because we would like to make it convenient, certainly.

Motheo Khoaripe 16:33

Then when it comes to repaying the loan, now this decision it becomes quite hard for some because some will say I'm responsible enough to pay it every month and deposit the money while some will say I know my discipline is very weak so I'll rather

have something that will make sure I'm paying that debt with my eyes closed. How do we work around the repayment options?

Senzo Lubisi 16:54

So there are different forms basically when you consider that at the beginning when the original limit is disbursed you will get a contract that stipulates what is the minimum installment that is expected and if you continue to pay that for the duration of the loan the account will remain in a good standing and most credit providers prefer that customers agree to a debit order for the installments to be deducted directly from their bank account. Customers can pay the full installment or opt for you know full installment plus additional where if you have a little bit of buffer after the minimum installment was deducted then pay a little bit extra this will actually reduce the balance and then in the longer term would save on the interest and the fees that are being charged basically but most importantly if you're going for these two options that are mentioned up to now then the bureau profile actually remains in a very good standing which is key for future credit applications.

Motheo Khoaripe 18:22

That's been the voice of Senzo Lubisi, the head of collections and ECM strategy at Old Mutual Finance, just holding our hand there and walking us through the credit contract, some of the options that you can have when having repayments and when things go wrong, how your creditor can also help you to get things right. Thank you so much for that conversation, Senzo. You've been listening to the Old Mutual Financial Literacy Podcast. Thank you. In this episode of the Old Mutual Financial Literacy Podcast, we covered understanding credit, what you need to do for your credit application, the benefits of paying your debt on time and what to do when you fall on hard times. In our next episode, we delve deeper into the legalities of your debt agreement.