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

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

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.

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