Re­lief for con­sumers as max­i­mum in­ter­est rate on loans slashed

Weekend Argus (Saturday Edition) - - GOODPOSTER - LOR­RAINE KEAR­NEY

From May next year, con­sumers can ex­pect some re­lief on their loans: the gov­ern­ment has slashed in­ter­est rates on per­sonal loans and has sim­pli­fied the for­mula used to cal­cu­late the max­i­mum in­ter­est rate on loans.

Cur­rently, the for­mula for cal­cu­lat­ing the max­i­mum in­ter­est rate is the repo rate mul­ti­plied by 2.2 plus X per­cent, where X varies ac­cord­ing to the type of credit agree­ment. This means that, when­ever the repo rate goes up, the in­ter­est rate you, as a bor­rower, pay also rises.

How­ever, the gap be­tween the two in­creases as the repo rate is in­creased, be­cause if the repo rate rises by one per­cent­age point, the max­i­mum in­ter­est rate rises by 2.2 per­cent­age points.

But the gov­ern­ment has changed the model en­tirely, do­ing away with the mul­ti­plier.

The min­is­ter of trade and in­dus­try gazetted the new for­mula on Novem­ber 6.

The changes will come into ef­fect in six months.

The new for­mula for cal­cu­lat­ing the max­i­mum in­ter­est rate is the repo rate plus X, where X varies ac­cord­ing to the type of credit agree­ment. For un­se­cured credit trans­ac­tions (also known as per­sonal loans), this is the repo rate plus 21 per­cent a year.

For short-term trans­ac­tions, the max­i­mum in­ter­est is five per­cent a month on the first loan and three per­cent a month on sub­se­quent loans within a cal­en­dar year. (A short-term loan is any amount less than R8 000 and payable over not more than six months.)

This means the max­i­mum in­ter­est that can be charged on short-term loans will be 38 per­cent in a cal­en­dar year, a sub­stan­tial de­crease from the 60 per­cent a year that can now be charged, based on five per­cent a month.

This is im­por­tant for rolling loans, which are when a small loan – for ex­am­ple, R2 000 – is taken out and, af­ter two or three in­stal­ments are paid, the lender of­fers the con­sumer an­other loan. This can re­sult in the con­sumer be­com­ing trapped in a debt spi­ral.

In­ter­est­ingly, for de­vel­op­ment credit agree­ments – those for small busi­nesses or the de­vel­op­ment of low-in­come hous­ing – the max­i­mum in­ter­est rate is the repo rate plus 27 per­cent a year.

In ad­di­tion, the min­is­ter has gazetted max­i­mum ini­ti­a­tion fees and max­i­mum ser­vice fees. The lat­ter are capped at R60 a month.

The ini­ti­a­tion fees for un­se­cured credit and short-term credit have been capped at R165 per credit agree­ment, plus 10 per­cent of the amount in ex­cess of R1 000, but never more than R1 050.

“The new lim­its add sta­bil­ity and pre­dictabil­ity to the monthly credit pay­ments of lower-in­come con­sumers, who are also the most re­liant on un­se­cured debt,” says Ge­ordin Hill-Lewis, a Demo­cratic Al­liance Mem­ber of Par­lia­ment who is on the port­fo­lio com­mit­tee for trade and in­dus­try.

“This is a vic­tory for all credit con­sumers, but es­pe­cially so for low­in­come con­sumers.”

Stephen Lo­gan, the founder of Fair Credit NPC, which helps gov­ern­ment and in­dus­try reg­u­la­tors to curb preda­tory credit prac­tices, says he is pleased that the gov­ern­ment has sim­pli­fied the way in which the mar­ginal in­ter­est rate is cal­cu­lated.

“This will help con­sumers. It makes it a lot sim­pler. It is crit­i­cal from a con­sumer per­spec­tive to know what you are go­ing to pay, and there should be a cal­cu­la­tor on the Na­tional Credit Reg­u­la­tor’s web­site where each in­di­vid­ual can work out ex­actly what they will pay.”

He also urges the reg­u­la­tor to in­form the pub­lic what their monthly re­pay­ments will be af­ter the Re­serve Bank an­nounces a change in the repo rate. “There will be some pain in the mar­ket, but in­ter­est rates do need to come down,” Lo­gan says.

“It may mean that some busi­nesses that have high in­ter­est rates will have to close, but it does open the space for more in­no­va­tion in how lenders do busi­ness.”

Com­men­ta­tors have ar­gued that if the cost of credit de­creases – es­sen­tially, if in­ter­est rates, ini­ti­a­tion and ser­vice fees fall – lenders will not earn enough money to cover write-offs or to con­tinue do­ing busi­ness and will go un­der.

As a re­sult, the low­est in­come earn­ers, who have no ac­cess to se­cu­rity or col­lat­eral, will be forced to turn to un­scrupu­lous, un­reg­is­tered mi­cro-lenders.

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