Let’s assume for a second that you’ve decided to take out a personal loan.

How much are you going to be charged? And more importantly what charges are the credit provider legally allowed to levy against your loan or credit agreement?

The National Credit Act deals with all these credit charges and it’s really about time we, as consumers, started understanding how much we are in for. I mean you wouldn’t go in for heart surgery without understanding all the facts, so why do so many of us borrow R100 000 on a whim, without blinking an eye or reading through the finance agreement?

The first thing the National Credit Act does is classify loans into seven categories. Let’s have a look at them in more detail:

• Mortgage loans (commonly referred to as a Bond in South Africa)
• Credit cards and store cards
• Unsecured credit such as personal loans, where no security is provided for the loan
• Developmental credit for things like low-cost housing, educational loans, and for starting up a small to medium-sized business
• Short term transactions such as microloans and pawn transactions (loans smaller than R8 000)
• Other credit agreements such as credit guarantees from a debt counsellor
• Incidental credit agreements when the borrower fails to pay as a promised and the lender charges them some form of a penalty.

To take things a step further, each of the above-mentioned loan categories have 3 different costs which can be charged:

• Interest rate costs
• Initiation fees, and
• Credit life insurance

Interest Rate Costs

Interest rate costs are based on the repo rate (RR). The repo rate is the rate at which the Reserve Bank lends money to commercial banks, that you and I bank with (like ABSA, Capitec, FNB, Nedbank, Standard Bank etc). Credit providers that loan money out are really just borrowing cash from the Reserve Bank, adding a margin on and re-selling it.

How much interest can be charged?

• For mortgage agreements (that would be the bond on your house), the maximum interest rate credit providers can charge is 18,75% per annum.
• For credit facilities, which include credit cards, overdrafts and petrol cards, the maximum interest rate credit providers can charge is 20,75% per annum.
• And for unsecured credit transactions, which consist mainly of personal loans, the maximum interest rate credit providers can charge is 27,75% per annum.

Initiation Fee

Credit providers are also allowed to charge consumers an initiation fee. An initiation fee may never exceed 15% of the principal debt. This is generally a once-off fee, in which financial institutions will consider fair remuneration for the administration involved in your application process. A service fee can also be charged by the credit provider for servicing the credit agreement and it must not be more than R60 excluding VAT.

Credit Life

Credit providers are also allowed to charge consumers a credit insurance premium, which will be covered in the credit agreement. This is put in place in case the consumer dies, gets retrenched or becomes disabled, whilst they still owe the credit provider money.

The problem with credit life is that it’s expensive life cover. Rand for Rand it’s far cheaper to take out a regular life cover policy with an insurer, but you might not necessarily be able to cede your existing policy to the bank as security against the loan. However, it’s worth asking the question if you have existing life cover in place.

So that’s it in a nutshell.

If you take out a personal loan, you can expect to have 3 charges levied against that loan, including an interest charge than cannot be more than 27,75% per annum. It might not be as much as that, bearing in mind that each personal loan application is looked at individually and several criteria are used to evaluate the outcome.

NB: Please only submit your details below if you are interested in Debt Review, not if you are looking for a loan.

Kind regards,

The SA Debt Advisors Team