What is the National Credit Act?

South Africa implemented radical changes to their lending practices in 2007. The National Credit Act of South Africa was created to protect both lenders and borrowers from negligent lending practices that resulted in over-indebtedness for consumers. The new National Credit Act obliged lenders to practice due diligence and inform borrowers of laws and consequences that could affect them by borrowing money and over extending their credit. Banks are now handling loans quite differently from the way they used to. Consumers are now more educated about taking out a loan and the repercussions of not repaying debt on time.

Before the act was enforced, the only thing borrowers needed to do to get a loan was to prove that the payment of their mortgage would comprise of only 30% of their income. The old system allowed consumers to borrow money without disclosing their credit background or debt history. The lenders also didn't bother to do background checks. This caused many borrowers to be granted loans they could not afford to pay. A lot of the borrowers went into default and credit scores plummeted.

Under the 2007 National Credit Act of South Africa, banks and financial institutions were required to ask for the borrower's credit history. Borrowers had to show income statements and disclose all outstanding debts. These include car payments, alimony, child support payments, student loans, credit card bills, etc. Bankers are now able to asses a borrowers capacity to pay from these documents presented with the application for a loan.

While it may seem like they have gone overboard this time around, there are actually many benefits to this Act. It is actually standard practice in other countries but something South Africans still have to get used to. Banks and borrowers are now held liable for misconduct or questionable practices. The bar has been raised and banking standards are better. Today, if a bank allows the borrower to over extend his credit, the bank may be fined and the borrower can legally stop paying the loan if he is unable to keep up with payments. On the other hand, if the borrower provides false information on his application, the bank may revoke the loan and take possession of assets linked to the loan.

The National Credit Act has greatly affected the procedure of lending and borrowing alike. Although the full effects remain to be seen, almost everyone would agree changes really needed to be made to safeguard the reputation of banks and other lending institutions. It also protects borrowers from being uninformed and misguided victims by unscrupulous lenders. The borrowers obligation is simply to disclose his or her financial records upon application for a loan.

The Act also requires lenders and banks to educate borrowers about what they are about to get into. Even the fine print on the contract has to be explained in detail so that the borrower fully understands the agreement and consequences of not paying their loans in a timely manner. It actually benefits both parties and the financial system as a whole.

The author specializes in SA home loans. To read more visit http://secubond.co.za