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New credit fees, rates laws to hit consumers in 2016

Nov 30 2015 20:30

Cape Town - Recently announced regulations limiting fees and interest rates in the unsecured lending space may boost the loan shark industry, warn industry experts.

Minister of Trade and Industry Rob Davies announced new measures in the Government Gazette on November 6.

These rules will affect all consumers who have credit such as home loans, vehicle finance or any other loans.

According to the Department of Trade and Industry, the new maximum interest rates for all types of credit agreements will reduce the cost of credit for consumers.

“The final regulations will bring about reduction of cost of credit when consumers are applying for credit,” said dti spokesperson Sidwell Medupe.

READ: Govt cap on interest rates to help consumers - dti

The new regulations will come into affect in May 2016 and will set a standard of maximum calculated amounts which credit providers will not be allowed to exceed or abuse.

Wikus Olivier, debt management Expert at DebtSafe, said on Thursday that although most limitation fees and rates will drop, this could lead to reputable credit providers not approving loans as easily as in the past since it might not be profitable.

He added that this situation could also prompt more desperate people to turn to loan sharks - a bad thing for consumers because of the extremely high interest rates these lenders charge.

Izwe Loans CEO Rayanne Jacobson concurred with this view, and flagged the significant rise in short-term credit granted over the past 10 years. She believes this trend is set to continue, even as the new regulations are implemented.

"Credit providers are already finding longer-term loans less sustainable to finance and clients are not qualifying as easily as previously and are moving towards shorter-term loans, often with unregulated lenders," said Jacobson.

READ:  Beware of unintended consequences of fees, rates cap

Consumers often overlook admin and service fees when applying for credit, said Olivier. However, these fees can form quite a significant part of their monthly instalments and it's simply common sense that lower fees will mean paying debt off faster.

"In terms of the new Credit Amendment Act Regulations, credit providers must disclose all fees, interest and charges before any credit is given. As consumers we need to do our research to understand the maximum fees that are allowed and check that charges levied are legitimate before we accept the credit,” cautioned Olivier.

Bottom line: consumers should be vigilant when they apply for credit, and make sure they understand all aspects surrounding the credit quotation and what will form part of their monthly instalment.

Credit life insurance

Credit providers may require consumers to take out credit life insurance for the term of the agreement, which would settle their debt in events such as death, disability or retrenchment.

This type of insurance usually forms a significant part of debt instalments, with some credit providers charging very high premiums.

Olivier pointed out that it is within a consumer’s right to decline the insurance offered by the credit providers and apply his/her own policy to the debt.

According to the new regulations, the maximum prescribed cost of credit life insurance is:
 
Mortgage agreements: R2 per R1 000 of the deferred amount (excluding cost of credit)
Credit facilities: R4.50 per R1 000 of the deferred amount (excluding cost of credit)
Unsecured credit transaction: R4.50 per R1 000 of the deferred amount (excluding cost of credit)
Short term credit transaction: R4.50 per R1 000 of the deferred amount (excluding cost of credit)
Short term credit transaction: R4.50 per R1 000 of the deferred amount (excluding cost of credit)
Developmental credit agreements: R2.00 per R1 000 of the deferred amount (excluding cost of credit)
 
New maximum interest rate limits
 
Mortgages (bonds): repo rate + 12% (per year)
Current: 18.2%
New regulations: 18%
 
Credit facilities: repo rate + 14% (per year)
Current: 23.2%
New regulations: 20%
 
Unsecured credit: repo rate + 21%
Current: 33.2%
New regulations: 27%
 
Maximum initiation fees

The new regulations will affect initiation fees (what lenders may charge to consumers when they take out a loan) as follows:

Mortgages (bonds): R1 100 plus 10% of the amount in excess of R10 000. The maximum charge must never to be more than R5 250.
Credit facilities: R165 plus 10% of the amount in excess of R1 000. The maximum charge must never be more than R1 050.
Unsecured credit: R165 plus 10% of the amount in excess of R1 000. The maximum charge must never be more than R1 050.
Monthly account fees: R60 (was R50). 

wealth and investment  |  debt
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