A Legal Perspective on the Psychological Factors Behind Over-Indebtedness of Consumers

Abstract

Consumers who are susceptible to psychological factors, such as a lack of self-control and compulsive buying, require protection from becoming over-indebted. This question is addressed by evaluating the legislation applicable to consumer credit and analysing the psychological landscape that might lead financial institutions and other credit providers to prey on vulnerable debtors. The provisions in the National Credit Act 34 of 2005 (NCA) and the Consumer Protection Act 68 of 2008 (CPA) are insufficient to protect consumers prone to psychological factors linked to over-indebtedness from taking on more credit than they can afford. More should be included in the NCA than the costs, charges, and add-ons to credit as currently set out in the Act. In section 76 of the NCA, advertising and marketing prescriptions should be amended to address the psychological factors of over-indebtedness, warning consumers against credit risks. Section 3 of the CPA should be amended to include individuals with psychological difficulties as a category of vulnerable consumers, and section 22 of the CPA should require an explicit notice alerting potential consumers that taking on credit inevitably involves costs. Evaluating psychological factors as causes of over-indebtedness highlights the potential of financial education, through financial literacy and credit marketing, with warnings added to advertisements. This approach could help individuals with a lack of self-control or those prone to compulsive and impulsive buying to reconsider taking up credit and becoming over-indebted. Consumers need a high level of financial literacy to digest the information and assess it adequately. A   a holistic approach is  recommended that combines financial literacy and education in a multidimensional framework to regulate credit providers. Adopting this approach would ensure that they advertise credit in a manner that does not exploit individuals with compulsive and impulsive buying syndromes or those lacking the self-control to resist advertisements. Advertising should warn potential clients that credit can be dangerous, ensuring that individuals benefit from credit opportunities and are not destroyed by them.