The interest rate is only one of four charges on an unsecured loan. The National Credit Act caps all of them: the rate, the initiation fee, the monthly service fee and, indirectly, the credit life insurance. Here is what the caps are and how to add them up.
South Africans compare loans by the interest rate because it is the number lenders advertise. But an unsecured personal loan carries four separate charges, and the National Credit Act (NCA) puts a ceiling on each. Knowing the ceilings lets you read a quotation properly and spot a loan that is priced at the legal maximum.
1. The interest rate
For unsecured credit the NCA regulations cap the annual interest rate at the repo rate plus 21 percentage points. With the repo rate in the region of 7%, that is roughly 28% a year, which is why so many lenders quote “up to 28%” or “up to 29,25%” on their pages. A strong profile is quoted well below the cap; a weak one sits on it. Nedbank says the typical South African pays between 18% and 28%, and Absa publishes a starting rate of 13,75%.
2. The initiation fee
This once-off fee for opening the credit agreement is capped at R1 207,50 including VAT for a loan of R10 000 or more (it is lower on smaller loans: R165 plus 10% of the amount above R1 000). Most banks charge the full cap. It is usually added to the loan and therefore attracts interest, which is why a R30 000 loan is really a R31 207,50 loan on the day it is paid out.
3. The monthly service fee
The NCA caps the service fee at R69 a month including VAT, and again most lenders charge the maximum. It sounds small, but it runs for the full term: R2 484 over 36 months, R4 968 over 72, R5 796 over 84. On a small, long loan the service fee can rival the interest.
4. Credit life insurance
Lenders may require credit life cover on unsecured loans, and the regulations cap the premium at R4,50 per R1 000 of the outstanding balance per month. Capitec, for example, prices its cover between R2,58 and R4,50 per R1 000. You have the right to use a policy you already hold if it meets the requirements, and the premium should fall as the balance drops.
Putting it together: the total cost of credit
Take R30 000 over 24 months at 20% a year. The interest instalment is about R1 527; add R69 service fee and roughly R100 of insurance in the early months and the monthly payment is close to R1 700. Multiply by 24, add the R1 207,50 initiation fee and the total cost of credit is around R11 000 on top of the R30 000 borrowed. The same loan over 60 months costs about R860 a month in interest but well over R25 000 in total charges. The lender must give you a pre-agreement statement and quotation that shows exactly these totals before you sign; ask for it and read the “total cost of credit” line.
Comparing two quotations
Because the caps are the same for every registered lender, quotations differ mainly in the rate and in the insurance premium. Line up the two “total cost of credit” figures for the same amount and the same term, then check whether the insurance is the lender’s bundled product or one you can replace. A lower advertised rate with a more expensive credit life policy can end up costing more than a slightly higher rate with cheaper cover.
The rights that come with the caps
The NCA also gives you the right to settle early without a penalty on unsecured loans (the lender may only charge interest to the settlement date), the right to a written quotation valid for five business days, and protection against reckless lending: a lender that skips the affordability assessment can have the agreement set aside. If you think a loan breaches the caps, the National Credit Regulator and the Ombud for Banking Services take complaints free of charge.
