Is that loan really fees-able?

2011-11-26 09:15

Vincent wrote to City Press when he found out that his R17 500 loan, over 48 months, with African Bank was going to cost him a total of R42 683.52.

He needed the loan to help his younger sister pay for her studies in nursing. His own bank, Nedbank, wouldn’t lend to him because his vehicle debt was too high and they were also concerned about his affordability. So Vincent went to African Bank.

He said: “At the time, I thought repaying R889 per month was a reasonable amount, but when l sat down with this (African Bank) contract I saw this R42 683.52 as ridiculous.”

Unfortunately, African Bank is within its rights to charge these exorbitant fees as per the National Credit Act. The credit ombudsman has confirmed the fees and charges are within the law.

» The interest rate is 34.3% a year. This means that Vincent will pay R16 768.03 in interest alone;

» He is paying R57 a month in service fees – a total of R2 736 over the 48 months period;

» The insurance which pays out for disability, death and retrenchment is costing him R94.57 a month – a total cost of R4 539. This works out at about R5 per R1 000 insured which is high but not criminal; and

» He is also paying a once-off loan initiation fee of R1 140.

These amounts are breathtaking in their enormity, however, the reality is that micro-lenders like African Bank, Real People and Capitec are able to charge these high interest rates and fees.

They justify it based on the risk of the client. If the client’s own bank won’t lend to him then that gives an indication that he is a higher risk.

The only advice to Vincent is that he try and pay off the African Bank loan as quickly as possible in order to reduce the costs.

According to Marilyn Budow, consumer advocate at African Bank, if Vincent starts immediately to pay an additional R150 a month, his loan will be paid off by next October as opposed to the current July 2014.

This will save him R774 in insurance costs, R3 000 in interest and R513 in service fees. That is a significant saving of R4 287.

This is the reason everyone keeps telling you to pay off your debt as quickly as possible. It is the best way to save money.
There are three lessons to take from this experience:

» Be aware that any debt you take on will affect your ability to take on other debt in the future. If you find yourself in an emergency situation, you may be forced to borrow at high rates from a micro-lender;

» Don’t be fooled by the monthly instalment.

Find out what that loan will cost you in total over the time period. Try to keep the length of the loan as low as possible. This will increase your monthly repayments while lowering the total cost; and

» Don’t accept insurance at face value. You are allowed to take out insurance through other
insurance providers and you are allowed to cede existing policies.

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