The need for easy access to cash by the under serviced low-income sector of the industry led to a boom in the micro lending industry about a decade ago. While the micro lenders (Mashonisa in isiZulu) provided a bridge between the traditional banking sector and those who would not qualify for loans, their reputation for being unscrupulous loan sharks quickly grew, often with justification.

People were lured into paying exorbitant interest rates (up to 300%), paying back many times more than the initial value of the loan. Clients were often forced to hand over bank cards and PIN numbers, as well as identity documents; the lenders would then withdraw money from the account to service the debt. The loan sharks among them would withdraw almost the entire wage to service the debt - this left the client with no alternative but to take out a second loan in order to feed the family… and the inevitable trap of debt began. 

Until 1999 this burgeoning R15-billion per annum micro lending industry was unregulated, and many honest, hard working people were lured into ever an ever increasing cycle of debt. Unscrupulous lenders (loan sharks) took advantage of the need and ignorance of their clients - even getting them to sign blank documents and consent to judgements forms when applying for the loan.

In 1999 the Usury Act was amended to regulate the micro lending industry. Micro lenders (those providing loans of less than R10 000 for a period of three years or less) are now required to register with the Micro Finance Regulatory Council (MFRC), a regulatory body for the industry. While this has improved the reputation of the industry somewhat, there are still a number of facts the consumer should be aware of:

• The rate quoted by micro lenders in the Durban area ranges from between 8 - 30%, depending on the security provided. While this sounds competitive, the rate quoted is per month, not per annum as quoted by the traditional banking sector. This makes the effective interested rate 96 - 360% per annum - quite a different picture!

• One Durban company would provide a R2000 loan for a period of six months at an interest rate of 8.62% per month. This might sound good, but the repayment is R495 for six months - which means that a lender would payback almost R3000 to borrow the R2000 for six months.

This illustrates that loans cost money, and loans from micro lenders even more. Taking a small (under R10 000) loan over a term of three years or less might seem like a simple solution to your financial woes - but you would be wise to remember the cost involved. Lenders are, after all, in business to make money, not to help you!

• Make sure the micro lender you choose is the member of the MFRC.

• Compare the interest rates of a number of lenders to get the best deal.

• Do not sign a contract with any blank spaces - put a line through any unfilled sections.

• Establish all the important terms of the contract before you sign - including the amount of the loan, the interest rate, any additional charges, the monthly repayment required and the number of payments you will have to make; as well as penalties and costs for late or missed payments.

• Do not borrow more than you need; pay the loan back over the shortest period possible; and make sure that you can still meet your other financial commitments (to avoid the debt trap).

• Insist on a copy of the contract after you have signed it.

• Do not hand over your ATM card, bank book, PIN number, identity documents or other similar items - it is illegal for a micro lender to request these.

• Do not sign any consent forms (to judgement or for garnishee orders) at the time of taking out the loan. This is not required for the loan to be approved.

• Report any irregularities or complaints to the MFRC on 0860 100 406.