Rules leave rip-off gap
Borrowers should take care to read the fine print in their credit life insurance policies.
Borrowers should take care to read the fine print in their credit life insurance policies. Even with the recent introduction of caps to the cost of credit life, they could still find themselves being ripped off.
New credit life insurance regulations effective from August provide credit providers with a loophole to continue exploiting consumers.
A compulsory part of credit agreements, credit life insurance enables lenders to recover on loans in the event of a borrower’s death or permanent disability. Although credit providers do not always inform borrowers of this right, under the National Credit Act, consumers are allowed to obtain credit life insurance policies from any insurer. But with unsecured loans, it is overwhelmingly the credit provider that also provides the credit life insurance policy.
Due to widespread overcharging by lenders on this type of cover, the National Credit Regulator introduced caps to the maximum monthly cost of credit life insurance on different types of credit agreements. From August, the monthly cost of credit life insurance per R1,000 of credit ranges from R2 on mortgages to a maximum of R4.50 on unsecured credit.
The caps are welcome, considering that previous averages ranged between R5 and R9, with some retailers charging as much as R57, says Sasha Knott, CEO of Switch2, which helps borrowers save money on credit life insurance.
Credit providers can unfortunately continue to overcharge clients due to a clause in the regulations that allows for credit life cover to be calculated “either on the deferred amount at the inception of the credit agreement or on the deferred amount from time to time under the credit agreement”.
Instead of applying the charge of R4.50 per R1,000 of credit to a declining outstanding balance, creditors can keep the cost of credit life static. They can charge the borrower on the full outstanding (deferred) amount, as “at the inception of the credit agreement”.
This would translate into a monthly premium of R45 on a personal loan of R10,000 for the lifetime of the credit agreement. On a declining balance, the premium would decrease monthly so by the time the borrower had R5,000 outstanding, she would be paying a premium of R22.50. It is not as if credit providers are providing the borrower with cover for the full loan amount over the lifetime of the loan. If they were, they should, on the death of the borrower, pay out the difference between the outstanding balance (rightfully theirs) and the initial loan amount. Despite this not happening, some continue to charge for the full loan amount.
Business Day approached the big four banks: Capitec, African Bank, Finbond, Lewis and Old Mutual Finance for information on how they were applying the regulations. Capitec and Standard Bank say they charge credit life insurance premiums on a reducing balance. “We believe this is the right way to do it, as the client is paying only for the cover that he is getting,” said Capitec CEO Gerrie Fourie.
African Bank calculates insurance premiums on a reducing balance on credit cards only, not on unsecured loans. At about 40%, African Bank’s claims ratio, says finance director Gustav Raubenheimer, is high by industry standards. Any further reduction in its margin will result in further reductions in new credit advanced, he says.
Incidentally, African Bank’s insurance business contributed a pretax profit of R388m to the bank’s R501m profit before tax for the six months to March.
Absa applies a level premium approach, charging between R3.25 and R3.85 for per R1,000 on personal loans.
Lewis, Finbond, Old Mutual Finance and Nedbank had not responded at the time of publishing. As they say in Latin, caveat emptor: buyer beware.