Reckless Lending: What It Is, Why It Matters, and How to Avoid It

In South Africa's tightly regulated credit industry, reckless lending isn’t just a technical term, it's a legal issue with serious consequences. For credit providers, understanding what reckless lending is, how to avoid it, and what happens if you don’t, is essential. Not only does it protect consumers, but it also safeguards your business and reputation.

Preventing reckless lending is a shared responsibility. While consumers are expected to provide honest and complete information during the application process, credit providers must conduct proper affordability assessments; as required by the National Credit Act (NCA).

So, what exactly counts as reckless lending, and how can credit providers avoid falling into that trap? Let’s break it down.

What Is Reckless Lending?

Reckless lending happens when a credit provider approves a loan without properly assessing whether the consumer can afford to repay it, or grants the loan knowing the consumer is already over-indebted.

According to the National Credit Act, a loan may be considered reckless if:

The credit provider failed to conduct a proper affordability assessment.
The consumer did not understand the terms, risks, or obligations of the loan.
The loan caused the consumer to become over-indebted.

In simple terms: if the consumer can’t reasonably afford to repay the credit and the lender didn’t follow the correct assessment process, the credit agreement may be declared reckless.

How to Be a Responsible Lender

Being a responsible lender goes beyond just meeting compliance requirements, it means fostering ethical, informed lending practices that support long-term financial health for your clients.
Here are some key steps:

Conduct Comprehensive Affordability Assessments
- Confirm income using valid documentation (e.g. payslips, bank statements).
- Assess all monthly expenses, existing debts, and discretionary spending.
- Ensure that the credit amount aligns with the consumer’s disposable income.
Educate and Inform the Consumer
- Clearly explain the loan terms, interest rates, fees, and repayment expectations.
- Use plain, simple language — no jargon, no fine print confusion.
Keep Detailed and Accurate Records
- Document the entire assessment process.
- Store communication logs, signed agreements, and disclosure statements.
- These records protect both the lender and the consumer if issues arise.
Use Smart Credit Tools — but Apply Human Oversight
- Use robust credit scoring systems that assess true affordability.
- Avoid relying entirely on automation — manual review is crucial for edge cases.

What Happens If You’re Caught Engaging in Reckless Lending?

The consequences of reckless lending are more than just administrative, they can be legally and financially damaging. If the National Credit Regulator (NCR) or a court finds your credit agreements to be reckless, the following may happen:

You may lose the right to collect on the debt. In serious cases, the agreement can be set aside, and you may not recover the loan at all.
You could face legal action and fines. Non-compliance with the NCA can result in penalties or other sanctions.
The agreement may be suspended. The consumer could be temporarily or permanently released from repayment obligations.
The debt could be restructured. Courts may order a more manageable repayment plan.
Reputational damage. Being flagged for reckless lending can impact your credibility, licensing, and future opportunities in the credit industry.

Consumers who believe they’ve been granted credit recklessly can approach the National Consumer Tribunal or work through a Debt Counsellor, potentially triggering an investigation.

How to Prevent Reckless Lending in Your Business

Proactive prevention is always better than damage control. Here’s how to stay compliant and responsible:

Train your teams regularly on the National Credit Act and real-world application of affordability assessments.
Conduct internal audits to identify risky lending behaviours before they become violations.
Balance tech with human review automation is useful, but context matters.
Appoint a compliance lead or team to oversee and enforce lending protocols.

Reckless lending isn’t just a legal problem, it’s a failure to uphold the trust consumers place in credit providers. In an economy where credit plays a key role in people’s lives, lenders have the power to uplift or harm.

Being a responsible lender means more than avoiding penalties, it’s about building long-term trust, improving financial outcomes, and contributing to a healthier credit market.

Responsible lending isn’t just a requirement. It’s a business advantage.

Contact ACPAS for details

Contact Us today for more information about our automated Loan Management System (LMS) where we can help you manage your customers and avoid reckless lending!

Reckless Lending: What It Is, Why It Matters, and How to Avoid It