Cape Town - Interest rate caps and caps on initiation fees for credit agreements introduced in November 2015 were aimed at protecting the consumer. It might have the opposite effect, though.
In South Africa there are two types of lenders: the legal ones and the illegal ones. The legal ones include financial institutions and registered micro lenders. The illegal ones are known as loan sharks, and they do not adhere to the following rules governing the micro lending industry:
• The maximum amount that may be loaned is R10 000;
• These should be paid back within 36 months;• They cannot be paid back using other forms of credit; and
• The business must be registered with the Micro Finance Regulatory Council.
Micro lenders (both legal and illegal) provide unsecured loans to clients who might have difficulty fulfilling the lending criteria of banking institutions.
But by capping the interest rates legal lenders can charge, these institutions will be earning less money for the same risk, says Ian Wason, CEO of DebtBusters.
This means that it becomes unviable for them to give loans to anyone who is considered a high-risk borrower. That means they will be more stringent in evaluating potential customers’ creditworthiness, and will be lending money to fewer applicants.
Those needing to borrow money will simply be going elsewhere – and the more desperate they are, the less they can afford to concern themselves with the ethics of the micro lender.
The maximum rates, as published in the Government Gazette on 6 November 2015, that lenders may now charge for various types of loans are as follows:
• Unsecured credit RR + 21% p/a
• Mortgage agreements: RR + 12% p/a
• Credit facilities: RR + 14% p/a
• Developmental credits RR + 27% p/a
• Incidental credits: 2% p/m
• Other credit agreements RR + 17% p/a
• Short-term transactions: 5% p/m on first loan and 3% p/m on subsequent loans within a
Those needing to borrow money, and who do not fulfill the criteria stipulated by legal lenders, will simply be going elsewhere – and the more desperate they are, the less they can afford to concern themselves with the ethics of the micro lender.
Clients, especially those who are desperate, have a low level of awareness of whether credit providers are registered with MicroFinance South Africa or the National Credit Regulator, according to a study based on research by MFSA and published by Compuscan in 2013.
Legal and illegal lenders in SA
There are three types of legal lenders in South Africa: The payday lenders, the pawn shops and those who use cars as collateral security. The payday loans can charge enormous interest rates, the pawn shops also charge high interest (and you risk losing your possessions), and the car ‘lenders’ often have many hidden charges such as storage costs. They also make you hand over your keys in many cases.
The illegal lenders have no right to lend any money to anyone at any interest rates. They prey on the desperate, who, once they are caught in this debt spiral with sky high interest rates, find it difficult to ever get out of it. They are also known for their strong-arm tactics in collecting loan repayments. They often make themselves guilty of making their clients hand over their ID books, bank cards and sometimes pension cards.
In February 2016 in Limpopo the National Credit Regulator retrieved the following from illegal lenders in a joint operation: 930 bank cards and pension cards and 149 ID books. Eight people were arrested. The NCR stated that these lenders were operating in contravention of the National Credit Act, and were committing a criminal offence.
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