Costs of Credit

Having a good understanding of what credit costs, including the terms, fees and other charges, will help you to make a sound borrowing decision and to ensure that you do not fall into financial trouble.

Nothing in life is free, including borrowing money from a credit provider. Credit always has costs attached to it and it is important for you to take note of these costs before entering into any credit agreement where you commit yourself to paying back the money borrowed with interest.

Credit Costs and Fees

As you learnt in Section 5, the principal is the amount deferred in terms of the credit agreement, to which interest, fees, collection costs, default administration costs and credit insurance are added. Below are the different fees and charges you can expect to see on any credit quotation you receive from your credit provider:

Take Note

Insurance may be required in respect of covering the damage to goods such as a house, motor vehicle or furniture. You should note that you can choose an insurance provider of your choice; you don’t have to use the credit provider’s insurer.

Other charges credit providers can charge include the cost of an extended warranty agreement, delivery, installation, initial fueling charges, connection fees, levies or charges, taxes, and license or registration fees.

Summary
Credit advanced/value of goods or services provided on credit R Instalment including interest fees and credit life insurance excluding optional insurance R
Deposit, to be paid and deducted R Number of instalments
Instalments payable specify: monthly / weekly / other Total of all instalments, including interest, fees and credit life insurance, excluding optional insurance R
Interest Rate
Initiation Fee R Total cost of credit R
Monthly service fee R Credit cost multiple

  • Service fee: Credit providers can charge up to R50 (excluding VAT) a month, which is a monthly ad- ministration fee for them to administer your credit product.
  • Interest:This is the amount you are charged by the credit provider for the privilege of borrowing money, and is charged as a percentage of the principal amount. The NCA has set the maximum percentage of interest that you may be charged depending on the type of credit agreement, according to the table shown below.
  • Initiation fee: These are once-off fees credit providers charge you for entering into a credit agreement as set out in the table shown below.
  • Default administration charges: These are fees charged to let you know that your account is in arrears (in other words that you are behind on making regular payments on money owed).
  • Collection costs: These are costs in the event that a credit provider tries to collect outstanding or overdue debt from you.
  • Credit insurance: Credit providers may require you to take out credit life insurance during the term of the agreement, which settles your debt if death, disability or retrenchment prevents you from repaying the loan.

cost-of-credit-diagram

As you can see from the diagram, if you have a credit card with a balance of R10 000 over 24 months at 19% interest a year, it will take you 24 months to pay it off if you pay a minimum instalment of R504.09 a month, and you will pay R2 098.16 in interest and charges.

But if you pay more than the minimum, say R920.00 a month, you would pay it off in 12 months and only pay R11 058.84 in total, meaning you will pay R1 058.84 in interest and fees.

That saves you a total of R1 039.32 in interest and fees by paying more than the minimum, which is more than 10% of your balance saved.

Take Note

One of the important factors you should consider is credit insurance. This covers you if you cannot meet the repayments on your credit card or loan because of unexpected circumstances such as unemployment, sickness or injury. You need to check your pre-agreement statement and quotation to see whether your credit provider has included credit insurance costs. Credit insurance is not required by law for all credit products. Usually it is only required for secured loans, but some credit providers do require it for unsecured credit. You might consider buying this insurance for your credit product to cover you in the event of death, disability or unemployment, if you can afford the premiums.

Maximum and prescribed costs of credit

The NCA regulates how much credit providers can charge you in terms of interest and the initiation and service fees for different credit agreements.

Sub-sector Interest limit Initiation fee
Mortgage agreements (RRx2.2) + 5% per year a) R1 000 per credit agreement, plus 10% of the amount of the agreement in excess of R10 000
b) But never to exceed R5 000
Credit facilities, credit cards, store cards, overdrafts (RRx2.2) + 10% per year a) R150 per credit agreement, plus 10% of the amount of the agreement in excess of R1 000
b) But never to exceed R1 000
Unsecured credit transactions (RRx2.2) + 20% per year a) R150 per credit agreement, plus 10% of the amount of the agreement in excess of R1 000
b) But never to exceed R1 000
For the development of a small business (RRx2.2) + 20% per year a) R250 per credit agreement, plus 10% of the amount of the agreement in excess of R1 000
b) But never to exceed R2 500
For low-income housing (unsecured) (RRx2.2) + 20% per year a) R500 per credit agreement, plus 10% of the amount of the agreement in excess of R1 000
b) But never to exceed R2 500
Short-Term loans (5% per month or 60% per annum calculated daily) a) R150 per credit agreement, plus 10% of the amount of the credit agreement in excess of R1 000
b) But never to exceed R1 000
Other credit transactions (RRx2.2) + 10% per year a) R150 per credit agreement, plus 10% of the amount of the credit agreement in excess of R1 000
b) But never to exceed R1 000
Incidental credit agreements 2% per month Nil

RR: SARB’s repurchase rate (5.75% as at June 2015)

Take Note

You should also remember to check that your pre-agreement quotation or your credit agreement shows all fees and costs, including VAT (which is 14%). If it does not, you should add it to ensure you can still afford the credit or loan offered.

Cost of credit in terms of the National Credit Regulations
Amount of initial loan Duration of loan Interest (5% pm) (R) Initiation fee (pm when paid instalments) (R) Service fee (always R50 pm) (% of the initial loan) Total cost of credit (interest + initiation fee + service fee) (R & %)
1 R200 1 month R10 pm R32 pm 25% pm R92 pm
46% pm
2 R500 (average size 30-day loan) 1 month R25 pm R79 pm 10% pm R154 pm
31% pm
3 R500 6 months R25 pm R15 pm 10% pm R90 pm
18% pm
4 R1 000 1 month R50 pm R158 pm 5% pm R130 pm
13% pm
5 R1 000 6 month R50 pm R30 pm 5% pm R130 pm
13% pm
6 R1664 (average size micro-loan) 6 months R83 pm R43 pm 3% pm R176 pm
11% pm
7 R5 000 6 months R250 pm R108 pm 1% pm R408 pm
8% pm
8 R8 000 (max size short-term loan) 6 months R400 pm R167 pm 0.6% pm R617 pm
8% pm

So if you look at a short-term loan (taken over six months or less), you are charged interest per month, whereas the others are per year. If you take the 5% interest a month from this loan over a year (5 × 12), you get 60% total for a year.

With mortgage interest being the lowest, if you have a bond it might be better to access credit from your home loan account.

So if you have to take credit, borrow as little as possible, where you will be able to make payments greater than the minimum instalment. Why? If you can pay the amount back in a shorter time, you will end up paying less for the loan.

Take Note

On the pre-agreement statement and quotation, the credit provider must also show the credit cost multiple. This refers to the total cost of credit divided by the original loan amount (advanced principal debt).

For example: A consumer takes a loan of R2 000, but will repay R2 900 (total cost of credit including interest, fees, etc.). The credit cost multiple is then calculated as follows:

Total cost of credit ÷ advanced principal debt R2900÷R2000=1.45ratio

Cost of Credit: FAQ

What is a pre-agreement statement and quotation?

Before the conclusion of a credit agreement, you must be given a pre-agreement statement and a quotation. The statement is a document that details the terms and conditions of the credit agreement the creditor is offering you. The quotation discloses all the costs of the credit, showing the principal debt, the repayment schedule, the interest rate, other credit costs and the total cost of the proposed credit agreement. If you agree to and sign these documents, these become your credit agreement.

The NCA and its subsequent amendments and regulations states that credit providers must disclose and explain the total cost of credit to you so that you understand it. They must also ensure that the cost shown for credit facilities (such as store or credit cards, or an overdraft) is based on one year of full utilisation up to the credit limit proposed. The total cost of credit includes, but is not limited to, the principal debt, interest, initiation fee, a service fee aggregated to the life of a loan, and credit insurance aggregated to the life of a loan.

As you can see from the diagram, if you have a credit card with a balance of R10 000 over 24 months at 19% interest a year, it will take you 24 months to pay it off if you pay a minimum instalment of R504.09 a month, and you will pay R2 098.16 in interest and charges. But if you pay more than the minimum, say R920.00 a month, you would pay it off in 12 months and only pay R11 058.84 in total, meaning you will pay R1 058.84 in interest and fees. That saves you a total of R1 039.32 in interest and fees by paying more than the minimum, which is more than 10% of your balance saved.