What does credit cost?

All credit comes at a cost – but some credit attracts higher interest rates than other credit.

The cost of your credit may also be influenced by your ability to afford a loan and how you have handled credit in the past as reflected in your credit report.

Ideally you should choose the cheapest form of credit to fund your purchase. Try to avoid using costly unsecured credit – save to prefund large purchases as far as you can and pay off credit card debt each month, or as quickly as you can.

The total cost of using credit goes beyond the interest you incur and includes:

• The initiation costs;
• The ongoing fees;
• The interest rate;
• Short term insurance; and/or
• Credit life insurance you may be required to take out.

The term of the loan or credit may also influence the interest rate and will contribute to the total amount of interest you pay.

The interest rate

The National Credit Act sets the maximum amount of interest you can be charged on different kinds of credit and the rates are typically a formula based on the repurchase or repo rate.

The repo rate is the rate at which the South African Reserve Bank lends money to the commercial banks.

Generally you will be charged a higher interest rate on unsecured credit, such as using a credit card or taking out a personal loan, than you will on secured loans like a home loan or vehicle finance.

This is because the risk to the creditor is higher when the credit is not backed by the security of an asset that can be used to recoup the loan if you default on the repayments.

Don’t forget to check if the interest charged is at a fixed or variable rate. If it is based on the repurchase or repo rate, it is variable and will increase or decrease each time interest rates are increased or decreased by the South African Reserve Bank.

When you check if you can afford the repayments on a loan with a variable interest rate, do not forget to check if you can afford a few increases in the interest rate.

The interest rate you are offered will also depend on your credit record – if you have handled credit well in the past and the total amount of loans and credit you have is low relative to your earnings, you are likely to be offered a better interest rate.

Whatever interest rate you are offered, it may not exceed the maximum interest rates the Act provides for different types of loans:

A home loan

Repo rate + 12% a year

A vehicle loan

Repo rate + 17% a year

A credit card

Repo rate + 14% a year

An overdraft

Repo rate + 14% a year

A personal loan

Repo rate + 21% a year

A micro loan / short-term loan

A maximum monthly interest rate of 5% may be charged on the first loan in a calendar year.

If you take out a second short-term loan within a year, the maximum interest rate is 3% a month. 

A micro loan is an unsecured loan of up to R8 000 which is repayable in six months.

Incidental credit agreements

A maximum of 2% a month

These are credit agreements for bills such as those for doctors and dentists, school fees, legal fees or for service providers such as plumbers.

Typically you get 30 days to pay the bill, but if you fail to pay within that period, the NCA provides that you can be charged interest of up to 2% a month. 

Initiation fees

The National Credit Act provides for credit providers to charge once-off initiation fees when you take out a credit agreement up to the following maximums:

Home loans: R1100 + 10% of the amount above R10 000 but not more than R5250

Credit cards, overdrafts, unsecured credit and other credit: R165 + 10% of the amount above R1000 but not more than R1050

Incidental credit: No fees

Ongoing fees

Regulations under the Act provide for a service fee of R60 a month on any credit agreement.

Before you sign

The National Credit Act specifies that a credit provider must give you a quote before you enter into a credit agreement and that certain information must appear on that quote.

Before you sign, be sure you know:

• The original principal debt (original loan amount or purchase price of the item);
  
  
• The interest rate;
  
  
• Whether the interest rate is fixed or variable;
  
  
• The initiation and service fees;
  
  
• Whether you need to pay any residual or final amounts payable at the end of the contract (for example, if you buy a car with a residual or balloon payment at the end of the contract); Read more: Balloon payments are no party
  
  
• The number of instalments and the amount of each instalment;
  
  
• Any delivery and installation charges;
  
  
• Any connection fees (in the case of cell phones), taxes and licence or registration fees;
  
  
• Whether your purchase needs to be used as security for your loan and you need to insure it to protect the security for the loan;
  
  
• The cost of any such additional insurance offered by the provider and what it covers;
  
  
• Whether you need to take out credit life insurance to cover your debt repayments should you die, become disabled or suffer a loss of income; Read more: What is credit life cover?
  
  
• Any administration charges that may be imposed on you if you default on the agreement, when these charges apply and how these charges will be calculated;
  
  
• Any collection costs that may be charged if you default and how these charges will be calculated.

Once you have accepted the quotation you should receive a copy of the agreement which must be in clear, concise and plain language.