Understanding affordability – the new amendment

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If you have ever applied for a credit facility, you’ve probably heard the term affordability being thrown around before. You might also recall thinking to yourself at the time, ‘I can afford this, I don’t need someone else to tell me what I can and can’t afford.’

The truth is, affordability checks are really in place to protect you, the consumer, even if it doesn’t seem like it at first glance. In the past, affordability assessments merely encouraged responsible lending from credit providers. The new National Credit Act (NCA) amendment that came into play last month, forces credit providers to be responsible in their lending practices.

So what is an affordability check and why is it so important?

Simply put, affordability can be defined as your repayment-to-income ratio. Credit providers will ask you to fill out a form where you have to provide them with your gross monthly income as well as your gross expenses. Based on these figures, the credit provider will be able to determine if you qualify for the product that you applied for. Something that you should know however, is that credit providers don’t simply look at your earnings and expenses. Other factors like your employment history, credit history and number of dependants, to name a few, are all factors that contribute to the outcome of your affordability assessment.

Affordability assessments play an important role in our country’s economy. The new NCA amendment act will hopefully tackle over-indebtedness and address the consumer debt crisis South Africa is currently experiencing. The amendment act will definitely reduce the rate of successful credit application with these stricter affordability requirements being implemented from the 13th of March 2015.

How does the new amendment to the NCA affect you? The most important amendment to the NCA is for credit providers to acquire three months of bank statements as well as three months of payslips from consumers before a loan can be approved. Credit providers also need to calculate discretionary income (the amount of income available after essentials has been paid for) as well as all existing debts and maintenance obligations.

This means that getting your loan approved for that dream house or that sport car you’ve been eyeing might be even harder in the future – especially if revolving credit facilities are how you roll. This said, the NCA amendment act is really there to protect consumers from irresponsible credit providers (and themselves). The amendment will also protect consumers from becoming over-indebted and being thrown into the deep end with the loan sharks.

In a nutshell, the new affordability amendment might make it harder for consumers to be approved for credit facilities because of stricter affordability requirements. In the long run however, the amendment will essentially save South African consumers from digging an ever deeper grave for themselves in terms of indebtedness.

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