Most new loans should cost you less, thanks to regulations introduced earlier this month that cap what credit providers can charge you in interest and fees.
Although there has been a reduction in the maximum interest rates applicable to most forms of credit, the initiation fee and the monthly administration fee have increased. And one credit provider that serves the low end of the market has started charging for credit life assurance.
The big banks, with the exception of Standard Bank, said this week that they will charge the new maximum monthly administration fee of R60, excluding VAT, on new credit only, that is, credit agreements entered into on or after May 6, the date on which the new regulations under the National Credit Act (NCA) were implemented. In other words, existing credit agreements with Absa, Capitec, First National Bank and Nedbank will not attract the higher monthly fee.
Standard Bank said this week it could not comment on whether it will apply the new monthly fee to existing agreements.
However, none of the banks will apply the reduced interest rates to existing credit agreements.
This is the first time since the NCA came into force in 2007 that the fees and interest rates that apply under the Act have been adjusted.
maximum interest rates
In the case of most types of credit agreement, the formula used to calculate the maximum interest that you can be charged is based on the repo rate (RR) plus a percentage.
The Monetary Policy Committee of the South African Reserve Bank this week decided to keep the repo rate unchanged at seven percent.
The interest rate you are charged by a lender is based on your risk profile, except in the case of an incidental credit agreement, such as school fees or a medical bill, which is payable at month end but attracts interest if you fail to pay on time.
If your risk is low, you should get credit at the lowest interest rates, but if you’re a bad risk, a lender can charge you the maximum rates set in the regulations.
You should not be shy to negotiate a good interest rate based on your profile. Also scrutinise your fees. The regulations clearly state that an initiation fee must be charged only when a new credit agreement is established and not on a “transactional basis where there is no new credit agreement”, as in the case of an overdraft facility.
Here is how the maximum interest rates have changed for different types of loans:
• Home loans and developmental credit agreements (credit for a small business or low-income housing). The maximum interest rate you can be charged on a home loan is now 19 percent a year (RR plus 12 percent). The maximum you can be charged on a developmental credit agreement is now 34 percent interest a year (RR plus 27 percent).
The maximum initiation fee on a home loan is now R5 250, and on a developmental credit agreement the maximum fee is R2 600.
• Unsecured loans. The most you can be charged in interest on an unsecured loan (a personal loan) is now 28 percent (RR plus 21 percent). It was 35.4 percent.
In spite of the big reduction in the interest rate, the difference in instalments is negligible. Capitec provides the following example: if you had taken out a R20 000 personal loan before May 6, which you were paying off over 24 months at the maximum interest rate of 35.4 percent, you would be paying a monthly instalment of R1 298.55. If you took out the same loan from Capitec tomorrow, you would pay an instalment of R1 291 a month. That’s a difference of only R7.55. This is partly because of the higher administration fee (R68.40, rather than R57) and because Capitec has started charging consumers for credit life assurance.
The bank is charging the maximum proposed rate of R4.50 per R1 000, Charl Nel, the head of communications at Capitec, says.
However, he says about 85 percent of the bank’s clients will pay below the cap proposed in draft regulations issued by the Department of Trade and Industry.
The maximum initiation fee on an unsecured loan is R1 050.
• Credit facilities. The maximum interest rate you can be charged on an overdraft, credit card or store card account (also known as a credit facility) is RR plus 14 percent.
The maximum initiation fee on credit facilities is R1 050.
• Vehicle finance. The maximum interest rate you can be charged for vehicle finance is now 24 percent a year (RR plus 17 percent).
Rudolf Mahoney, the media liaison for Wesbank, says vehicle credit agreements fall into the category of “other credit agreements” in the revised regulations. Although the regulations provide for a maximum rate of RR plus 17 percent for other credit agreements, typically, the most you will be charged in interest is prime (currently 10.5 percent) plus five percent.
The maximum initiation fee on “other credit agreements” is R1 050.
• Incidental credit. The maximum interest rate you can be charged for an incidental credit agreement remains unchanged at two percent a month.
• Micro loans. The most you can be charged for a micro loan is still five percent a month, but this applies to the first loan only. The interest rate drops to three percent a month for subsequent micro loans taken in the same calendar year. Before the regulations came into effect, consumers could be charged an annualised interest rate of 60 percent for these small loans.
In terms of the NCA, a micro loan is a “short-term credit transaction”, which is defined as a loan of no more than R8 000 that is repayable within six months.
HIGH COURT CHALLENGE
Having lost its High Court bid to suspend the implementation of the new regulations, Microfinance South Africa (MFSA), which represents most of the country’s registered microlenders, is fighting on.
Hennie Ferreira, MFSA’s chief executive, says the organisation will apply to the judge president for an urgent review of the judgment handed down earlier this month.