Understand loan scams and how to avoid them

Johannesburg - Illegal lenders, commonly known as loan sharks are on the rise in South Africa as vulnerable consumers faced with tough economic circumstances try and make ends meet. Targeting vulnerable consumers, these loan sharks are becoming more creative in their loan scams.

MicroFinance South Africa (MFSA) has confirmed the proliferation of unscrupulous lenders who exploit individuals who are in urgent need of financial assistance but lack access to traditional banking services. “With the complexities and high costs of compliance driving many legitimate microfinance institutions out of the market, a void has been created that illegal lenders are quick to fill,” says Leonie van Pletzen MFSA CEO.

Niresh Gopichand, Atlas Finance Risk Director, says while loan sharks are synonymous with exploitation they unfortunately taint the image of all lenders including registered responsible ethical lenders.

“We understand the growing concerns surrounding borrowing money online as some consumers have fallen prey to loan sharks offering seemingly attractive loans with hidden, exorbitant fees and interest rates. It’s crucial for consumers to recognise the signs of these predatory practices to protect themselves,” says Gopichand.

He says that loan sharks, demand upfront payment, charge excessive annual interest rates, making repayments overwhelming for borrowers, and leading to trapping individuals in a cycle of debt, leaving them struggling to pay off the loan while amassing additional fees.

Verifying Legitimate Lenders

Van Pletzen advises consumers to get into the habit of verifying the legitimacy of a microfinance lender which can be done on various platforms including the National Credit Regulator (NCR) website (www.ncr.org.za) which provides a list of registered credit providers. Additionally, MFSA offers direct verification assistance and encourages consumers to report suspicious activities through its website (www.mfsa.net).

How to protect yourself from loan scams

Gopichand shares seven essential tips for spotting loan scams:

1. Unrealistic guarantees for approval is a sure red flag. Be wary of lenders who promise guaranteed approval without assessing your creditworthiness. Legitimate credit providers always evaluate a borrower’s financial standing before granting a loan.
2. Request for payment of upfront fees or hidden costs in the fine print is a trick used by loan sharks. Reputable lenders deduct fees from the loan amount or include them in the repayment terms.
3. Scammers often use high-pressure tactics to rush decisions encouraging loan seekers to act immediately or risk losing out. Legitimate lenders provide time and information for careful decision-making.
4. Ignore unsolicited loan offers via email, text, social media, or phone. Legitimate lenders do not use aggressive outreach tactics.
5. Vague or absent contact information is a sign of fraudsters who often avoid listing contact details to evade accountability. Verify the lender’s physical address. Legitimate lenders operate from verifiable locations.

“The landscape of microfinance in South Africa faces significant challenges, but through continuous education, support, and stringent verification processes, consumers can avoid falling victim to loan sharks and scams. As the battle against illegal lenders and loan sharks continues, our efforts remain focused on ensuring that legitimate microfinance institutions can thrive and provide much-needed services to the underserved population,” concludes Van Pletzen.