Unsecured credit could cost you less in future
If parliamentarians have their way, the formula used to calculate the maximum interest rates that a credit provider can charge you will be revised so that the poor pay less for credit. Angelique Ardé reports
At the presentation of the National Credit Amendment Bill in Parliament this week, the Department of Trade and Industry (DTI) agreed to review the formula used to calculate the maximum interest rates that credit providers can charge you.
The maximum rates are fixed by the regulations under the National Credit Act (NCA), and the formula is based on the Reserve Bank’s repo rate multiplied by 2.2, plus a certain number of percentage points, depending on the form of credit.
For example, for mortgage finance the formula is the repo rate (currently five percent) multiplied by 2.2 plus five percentage points, which currently equals 16 percent. That is the maximum interest per year that a credit provider can charge you for mortgage finance. For unsecured credit, the formula is the repo rate multiplied by 2.2 plus 20 percentage points, which equals 31 percent. For unsecured credit, most lenders charge the maximum that they’re allowed to charge, but for a home loan, for example, it’s not unusual to be charged the prime rate, which is 3.5 percentage points above the repo rate.
The proposal to review the formula was made by Geordin HillLewis, the Democratic Alliance’s Shadow Deputy Minister of Trade and Industry.
Hill-Lewis distributed to members of the portfolio committee on trade and industry a graph and table illustrating the differential between what consumers of secured credit pay in interest compared with what consumers of unsecured credit pay, and how the gap widens disproportionately as interest rates rise (see “How interest rate gap widens”, right).
Hill-Lewis says everyone concedes that there must be a difference between what you pay for secured credit and what you pay for unsecured credit, because there is more risk associated with the latter, but poor people are consumers of unsecured credit, which can become unaffordable when interest rates are high.
When the repo rate is five percent, as it is now, secured credit can cost you as little as the prime rate (of 8.5 percent a year) plus or minus a percent or two, while unsecured credit costs up to 31 percent a year.
If the repo rate were to double to 10 percent, the prime rate would be 13.5 percent, but unsecured credit would cost more than three times as much, at 42 percent. And if the repo rate went up to 14 percent, prime would go up to 17.5 percent, but the maximum interest rate for food, clothes or furniture bought on credit would be a whopping 50.8 percent.
Hill-Lewis says the NCA allows the National Credit Regulator to set the interest rate formula, and the National Credit Amendment Bill provides a golden opportunity for it to be revised.
He says there is consensus among members of parliament across the board that the formula needs to change for the sake of the poor.
Presenting the bill in Parliament this week, Zodwa Ntuli, the deputy director-general for consumer and corporate regulation at the DTI, said the amendments to the NCA are not proposals to change policy, “which is sound”.
The intention of the amendment is to make the Act work for both the credit market and the consumer, Andisa Potwana, the director for consumer law and policy at the DTI, said.
Other issues raised by stakeholders – but not addressed in the bill – included:
◆ The high cost of credit life insurance, which the DTI is looking into;
◆ Consents to judgment and garnishee orders, which is being addressed by the DTI in collaboration with the Department of Justice;
◆ Prohibiting touting by debt counsellors;
◆ Converting codes of conduct into regulations; and
◆ The need for clearance certificates – also known as rehabilitation certificates – to be issued to consumers who are in debt counselling and who have settled all of their debts except long-term debt such as a home loan. A clearance certificate would enable them to take on debt that they can afford.
Hill-Lewis also proposed that law makers redraft – rather than delete – a section of the NCA that the Constitutional Court has declared constitutionally invalid. In the case of the NCR v Opperman and Others, the court found Section 89 (5)(c) to be inconsistent with the constitution because it cancels the rights of recovery of a lender who advances credit under an unlawful credit agreement.
The case involved farmer Fillipus Opperman, who loaned his friend Jacobus Boonzaaier R7 million to develop property. When Boonzaaier was unable to pay back the loan, Opperman applied for the sequestration of his friend’s estate. But a high court declined to make a final order because Opperman was not a registered credit provider, which rendered the credit agreement entered into by him unlawful and void.
Opperman challenged the decision and the Consitutional Court found in his favour.
“This provision is deleted from the amendment bill, which is a pity because it provides a powerful disincentive for people to offer illegal credit agreements. We’re saying rather rewrite it to make it constitutional,” Hill-Lewis says.
He has also proposed that section 92 of the NCA, which deals with the disclosure of the cost of credit, be tightened up so that there is no “wriggle room” for credit providers to neglect to disclose to you what your full monthly commitment will be, including all other charges such as administration fees and credit insurance.
Hill-Lewis says “sneaky” credit providers have interpreted total cost as the total cost of credit, excluding the add- ons, which catches consumers unawares.