Slight Relief for SA Borrowers – Lower Maximum Interest Rates Proposed

NCR Reviews Interest Rates and Fees 

On 3rd July 2015, the Department of Trade and Industry (dti) published a Government Gazette Notice, which is now open for public comment, proposing lower maximum interest rates for unsecured credit and revolving credit facilities.

These proposals are based on a review performed by the National Credit Regulator (NCR), which lead it to the conclusion that interest rates and fees must be reduced. The last review of interest rates and fees took place in 2007, just as the National Credit Act was fully enforced.

The regulations propose that the maximum interest rates for unsecured credit transactions, such as personal loans, be slashed by 7.9%, and that those for revolving credit facilities, such as overdrafts, credit cards and store cards be cut by 2.9%. Consumers would enjoy considerable immediate relief from a sudden drop in the maximum interest rate on unsecured loans down to 24.78%, from 32.65%.

Credit Life Insurance and Maximum Initiation Fees

However, the interest rates charged on credit life insurance would not decrease, nor would credit providers be prevented from charging the maximum service/initiation fees for loans, despite both putting considerable strain on low-income consumers.

If the new regulations are passed, a short-term loan, amounting to no more than R8,000 and paid back over no longer than 6 months, will still have a maximum monthly interest rate of 5%. However, if a second loan is taken out during that same year, the interest rate will drop to 3%.

Additionally, the maximum interest rate of 22.65% for overdrafts, credit cards and store/retail cards would fall to 19.8%. In this way, a lot of credit providers would have to drop their interest rates, to avoid the better part of their debt books becoming illegal.

Over-indebtedness and Reckless Lending

A slight increase of 5% for maximum initiation/service fees for loans has also been proposed. Despite, credit providers or micro lenders lobbying to have them doubled. These proposed maximum interest rates would change dramatically, if the repo rate were to rise to 12% as experts have predicted.

According to the NCR, these proposals are based on the sizeable growth of the unsecured credit market over recent years, a high level of current consumer over-indebtedness and pervasive reckless lending.

The predominant purpose if these lower maximum interest rates would be to create a balance between accessibility and affordability, representing the third leg of the government’s plan to curb over-indebtedness. Stopping credit providers from making extra profits from hidden credit-insurance sales comprised the second leg.

These proposed lower maximum interest rates are likely to have little effect on mortgages, as banks don’t charge maximum rates on home loans, for a number of reasons.

Only Slight Relief for Low-income Borrowers 

However, when it comes to short-term and unsecured loans, such as store or retail cards, the maximum permitted rate is generally charged. Recent consumer complaints received by the NCR support the notion that many credit providers have a tendency to lend at the maximum rates.

The proposed regulations are designed to support monetary policy and to soften the blow of the expected repo rate increase would have on maximum interest rates.

Overall, if implemented, these proposals will only provide low-income consumers, who primarily use high-interest small short-term loans, with slight relief.