Chapter 13
Types of credit agreements
Consumers are still not fully informed about the various credit agreements and the maximum interest rates that apply to each. This makes people who borrow money vulnerable. The two most common types of loans are explained below.
MICROLOAN
The NCA defines a micro-loan as a ‘short-term credit transaction’. This can be any amount below R8 000 and must be repaid over a period of not more than 6 months. The interest rate on microloans is usually very high. (See Microlending and microlenders)
UNSECURED LOAN
An unsecured loan (also called a personal loan) is usually for an amount above R8 000, where you don’t have any assets (own anything to the value of the loan, such as a house or a paid-up car) that the credit provider can claim from you if you stop paying the monthly installments that you agreed to in the contract.
Some banks and credit providers offer unsecured loans of up to R350 000 which must be paid back over a period of not more than 6 years. But the interest rate can be as high as 32% per year, which makes it difficult for many consumers to honour their contractual agreements. When applying for a loan always make sure that the interest rate is in line with the NCA limit.
The NCA also places a maximum amount that can be charged on other fees, for example, initiation fees, service fees, default fees and collection costs.
Insurance cover on loans is allowed but the charge must “be reasonable” and the consumer has the right to use or cede an existing policy instead of taking out a new policy.
The example table sets out the rates per category of credit agreement.
CATEGORY | MAXIMUM INTEREST FORMULA | EXAMPLE: IF THE REPO RATE IS 5% |
| 1. MORTGAGE AGREEMENT | (Repo rate x 2.2) + 5%] p.a | 17.1% |
| 2. CREDIT CARDS/FACILITIES | (Repo rate x 2.2) + 10%] p.a | 22.1% |
| 3. UNSECURED CREDIT TRANSACTIONS | (Repo rate x 2.2) + 20%] p.a | 32.1% |
4. SHORT-TERM CREDIT TRANSACTIONS (loans not more than R8 000 and payable in 6 months or less) | 5% per month (60% p.a) | |
| 5. DEVELOMENTAL CREDIT AGREEMENTS | (Repo rate x 2.2) + 20%] p.a | 32.1% |
| 6. OTHER CREDIT AGREEMENTS | (Repo rate x 2.2) + 10%] p.a | 22.1% |
| 7. INCIDENTAL CREDIT AGREEMENTS(cash transactions that are not paid and the account goes into arrears e.g doctor’s bills, clothing etc) | 2% per month (24% p.a) |
The NCA also places a maximum amount that can be charged on other fees, for example, initiation fees, service fees, default fees and collection costs.
Insurance cover on loans is allowed but the charge must “be reasonable” and the consumer has the right to use or cede an existing policy instead of taking out a new policy.