Does the National Credit Act stop the rot?
The National Credit Act (NCA) was lauded as ‘a saving grace’ for South Africa’s indebted consumer. It lives up to its promise by ensuring that lenders perform the necessary ‘affordability’ checks before extending credit, and by creating mechanisms (such as the debt counselling process) to assist defaulters. The Act has been welcomed as one of the most comprehensive consumer protection legislations in the world. Is everything as rosy as the lenders and legislators would have us believe?
Although the Act protects consumers from unscrupulous lending practices it does little to curtail the fees and interest charges levied by banks and other credit providers in exchange for their services. If anything the quantification of maximum fees and interest charges in the legislation has bolstered the bottom line of banks, mortgage originators and other credit providers. Why do we say this?
Charging the maximum the Act allows
Finance houses used to earn their money by charging interest on the principal amount of your debt. In the past you could finance your home or vehicle with reasonable up-front fees and a minimal monthly service charge. It seems the NCA was ‘hijacked’ by finance houses which carved out lucrative initiation fees and service charges within its pages. Lenders – already coining it by way of interest charges – can make thousands more by billing (in our view excessively) for various administrative activities. And they can make even more by including some of these charges in the principal debt!
Banks and other mortgage lenders can, for example, charge an initiation fee of R1 000 per agreement (plus 10% of the value of the principal loan in excess of R10 000) up to a maximum R5 000. That’s what they take for pressing ‘go’ once the loan agreement is in place. Remember they charge separate fees – such as a valuation fee – over and above this amount. Credit facilities and ‘unsecured credit transactions’ can levy an initiation fee of R150 per contract plus 10% of the agreement in excess of R1 000. Mark our words – this ‘maximum’ is usually applied as a rule!
A vehicle finance agreement collects R1 000 (ex VAT) at inception – and your bank will hit the R5 000 limit for home loan initiations too. Given the typical loan value it hardly matters that the Act restricts initiation fees to a maximum of 15% of the principal debt! If you’ve checked your home loan or hire purchase statement you will also notice a monthly service charge, typically also levied at the legislated maximum of R50 (ex VAT) per month. If you dare question the dealer or bank agent about these fees they simply shrug and mumble something like: “It’s stipulated in the NCA.” Stipulated indeed – it’s a suggested maximum – not a legislated charge as they suggest!
And then things get really expensive
Our brief investigation into the fees and interest charged on mortgages, hire purchase and other credit agreements was inspired by an email from a regular reader. The reader wondered what rates a loan company could justify on a short term credit agreement. He might be shocked by the answer. The maximum allowable interest rates and fees are stipulated in Chapter 5 of the Usury Act of 1973 (as amended), with the NCA referring to the Usury Act for such charges.
The Act prescribes maximum rates for lenders across a number of categories – all loosely based on the Reserve Bank’s repo rate (RR). So, for example, a mortgage lender can charge a maximum [(RR x 2.2) + 5%)] per annum. With RR at 6.5% (since 26 March 2010) any of the ‘big four’ banks can charge a maximum 19.3% per annum on mortgage loan. Fortunately competition in the mortgage lending space keeps the banks in check and your typical mortgage is within a percent of the prime mortgage rate, set at 10% since 26 March 2010.
If you’re in the market for short-term credit the story is entirely different. Such instruments carry a maximum interest charge of [(RR x 2.2) + 10%] per year, or 24.3% per annum. And lenders can charge a maximum of 34.3% per annum for unsecured transactions. An ‘unsecured credit transaction’ is clearly defined as a credit transaction in respect of which the debt is not supported by any pledge or other right in property or surety or any other form of personal security. But the real shock relates to so-called ‘short-term credit transactions’ – defined as a deferred amounts not exceeding R8 000 that will be settled within six months – which can attract monthly interest rates of 5%!
Banks and other credit providers coining it
How much profit does a standard mortgage lender rake in? We base our calculation on a typical home loan of R1m, no deposit and 10% interest fixed for 20-years. Under this scenario a typical local mortgage lender will bank R5 000 in initiation fees, R12 000 in monthly service fees and a whopping R1.3m (or more) in interest – all sanctioned by the NCA. And this doesn’t include the profit they make by selling your home owners and life insurance as part of the transaction.
An unsecured loan is even more profitable. A small lender that extends R50 000 over three years (at the maximum 34.3%) will bank R1 000 in initiation fees, R1 800 in monthly service fees and at least R33 000 in interest. And we have a sneaking suspicion some of the country’s ‘unsecured’ lenders are forcing you to ‘secure’ the transaction by taking out credit life insurance... Makes you think doesn’t it!
Editor’s thoughts: South African consumers must become more aware of their rights when entering mortgage and hire purchase agreements. Although the banks and other providers claim their initiation fees are ‘legislated’ they are actually charging the maximum allowed by the law. Does the NCA contravene competition laws by legislating maximum allowable fees and interest rates? Add your comment below, or send it to [email protected]
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A non paid medical account of R350 by my daughter has accumulated to R3000 in six months, despite her paying on it.....is it really legal? Report Abuse