They’ve offered me a personal loan at 25% per annum interest. Am I being ripped off?
I was checking my credit card statement the other day and asked myself the same question.
It all started when I withdrew some money at the ATM…
I don’t know if you bank at the same one as I do, but mine loves throwing up messages like: “You qualify for a loan of R200, 000…”
Now I couldn’t help noticing they didn’t mention how much they’re getting from the deal. You know…that little bit about interest rate and how much it’s going to cost me at the end of the day?
So I log onto the old internet banking and check out the interest rate they’re charging. Turns out it’s a whopping 25% per annum.
Have you thought how much this could cost?
So I have this handy little mortgage bond calculator. Here’s a copy if you want but remember to only change the numbers which appear in the yellow blocks on the top left hand side – mortgage_bond_calculator
I worked out a loan of a thousand Rand from them at 25% for just one year:
- R95.04 per month would be what I paid back
- R140.53 is the interest on that
- R1, 140.53 is what I’d fork out over the year.
- That’s 14.05% of the amount loaned
Now I was curious to see that same loan over two years:
- R53.37 per month would be what I paid back
- R280.92 is the interest on that
- R1, 280.92 is what I’d fork out over the year.
- That’s 28.09% of the amount I loaned
Eye opening, right? Now I wanted to know over 5 years:
- R29.35 per month would be what I paid back
- R761.08 is the interest on that
- R1, 761.08 is what I’d fork out over the year.
- That’s 76% of the amount I loaned
Okay, a ridiculous example (Who’s going to loan me R1, 000 over 5 years?), but it shows one thing – the longer the term, the lower the interest rate needed by you.
Imagine if I’d taken them up on their offer of R200, 000 at 25% per annum interest?
Isn’t there a law which governs this kind of thing?
Yes there is. The good old and trusty National Credit Act.
A credit product includes any of the belowmentioned:
- Credit cards
- Personal loans
- Clothing accounts
- Pawnshops, and
- Debt counselors
The National Credit Regulator controls the credit market which means you now know where to lodge your complaints against lenders and credit bureau’s (You know the same guys who blacklist you!).
We can get into the specifics of that in another article but I was curious to know where my 25% fitted into the ranks of what they’re allowed to charge. After all, if the maximum rate was 25%, and they were charging me 25%, I’d be thinking one of two things:
- Why do they think I’m the worst kind of risk (I know why, but how do they?), or
- So this is how they treat a loyal client who’s been with them for 10 years?
What then is the maximum they can charge?
Loans have been classified into seven categories with different rates for each:
- Mortgage loans, for example when buying a home
- Credit cards and store cards
- Unsecured credit such as personal loans where no security is provided for the loan
- Developmental credit for things like low cost housing, educational loans, and starting up a small to medium sized business.
- Short term transactions such as microloans and pawn transactions. The loans can’t be larger than R8, 000 and which must be repaid within 6 months
- Other credit agreements such as credit guarantees from a debt counsellor
- Incidental credit agreements occur when the borrower fails to pay as promised and the lender charges them some form of penalty interest.
Each of the abovementioned has certain costs which are allowed:
- Interest rate costs
- Initiation fees, and
- Credit life insurance
Interest rates and initiation fees
Interest rates are based on the repo rate (RR). Currently (in 2018) the repo rate is 6.75% per annum. The repo Rate by the way, is the rate at which the Reserve Bank lends money to banks.
So if you study the table below you will see that the maximum interest rate allowed for a mortgage bond is 18.75% per annum:
- 6.75% + 12% = 18.75% per annum
The initiation fee for that same mortgage bond is:
- R1, 100 plus
- 10% of the amount which exceeds R10, 000, but
- Limited to a maximum of R5, 250
Let’s assume you’re taking out a mortgage bond of R500, 000:
- R1, 100 basic fee
- R500, 000 – R10, 000 = R490, 000 to be used in the calculation
- R490, 000 x 10% = R4, 900
- R4, 900 + R1, 100 = R6, 000
- This exceeds the maximum of R5, 250 and so the initiation fee is capped at R5, 250
Credit life insurance
Credit life insurance is basically there to settle your debt if you die, become disabled. Some could possible even cover retrenchment. You generally can’t get around paying for this cover.
But the cost of this cover is limited as follows:
- Mortgage loans and Developmental credit – R2 per month per R1, 000 of the amount loaned
- All other loans – R4.50 per month per R1, 000 loaned. Lend R10, 000 in other words, and you pay R45 a month.
We hope this helped you figure out what a lender is allowed to charge. If you credit record is squeaky clean then by all means negotiate for a better interest rate. If it’s not as clean as you’d like shop around between various credit providers until you find something which works for you.
Remember that the longer the term of your loan, the higher the cost of credit. If they’re going to charge you an arm and a leg, and you’ve run out of options, select the shortest term possible.
Until next time.
The InsuranceFundi team