Loans could soon be getting cheaper. Yes cheaper. The Minister of Trade and Industry, Dr Rob Davies, has published for public comment a notice regarding limitation on fees and interest rates applicable for loans.
The purpose is to change the maximum rates for various types of loans:
· Unsecured credit from 32.65% to 24.78%,
· Mortgage agreements from 17.65% to 17.75%,
· Credit facilities from 22.65% to 19.78%,
· Developmental credits from 32.65% to 32.78% and
· Other credit agreements from 22.65% to 22.75%.
South Africa, according to studies by the Department of Trade and Industries (DTI) has a high level of over-indebtedness.
“Factors identified as contributing to this include weak affordability tests by credit providers, lack of honest disclosure by consumers, and generally high costs of credit caused by abuse of credit insurance, especially credit life insurance, extension of unsecured lending, as well as costs related to collection of debt and resale of loan books for further collection,” said the DTI.
But is this a good thing?
A cap on the interest rates means that lenders will not be able to overcharge consumers on their loans. Therefore, consumers will be in better financial standing when paying back their debts. Loans could be paid off quicker and the interest charges will of course be less.
But we don’t see lenders changing their affordability criteria. Stricter affordability assessments means that many consumers will no longer qualify for loans, resulting in many finding illegal ways of obtaining money or turning to so called loan sharks.
An article on Business Day Live states that “one study found that twice as many consumers in Germany and France, where there are interest rate caps, admitted to using illegal lenders compared to the UK, where there are none.”
Stricter criteria will impact the lower income earners the most. Lenders will see them as a greater risk to lend money to, so while the caps on loans will be a good thing overall it won’t solve the debt problem in South Africa.
Gaps in the NCA
The National Credit Act (NCA) was put into place in 2005 to help facilitate access to credit “in a fair and equitable manner, while it put controls in place to ensure that credit extended to consumers is affordable and not too expensive,” said the DTI.
However, due to the weakness of affordability assessments, consumers are still over-borrowing, leading many to spiral into debt.
The National Credit Regulator conducted a review of the NCA and the lending fees, and concluded that changes must be introduced to the limitation on fees and interest rates. Whether it will go some way to reducing the debt burden remains to be seen.