PREVENTOR DE REVENTONES (BOP)

Based on the figures in Tables P and Q and their review above, the following deductions can be made regarding the envisaged cost of credit:262

(a) The smaller the loan, the more expensive it will be. On short-term loans, for example, the total cost of credit is not 5% per month (the maximum interest rate), but 8% per month (96% per year) on a loan of R8 000. This cost rises steadily to 11% per month (132% per year) on a loan of R1 638. Thereafter, the cost of credit rises first steeply, then exponentially to the exorbitant level of 46% per month (552% per year) on a one month loan of R200.

(b) Although big unsecured loans will be expensive when compared to the current Usury Act maximum,263 _{this is not a helpful comparison since loans in}

excess of R10 000 which are bound by the Usury Act are almost invariably secured.264

(c) The capping of interest rates on smaller loans currently exempt from the Usury Act (a maximum loan of R10 000) will markedly reduce the cost of credit on loans in excess of about R1 000 from the common 30% per month. The cost of credit will be less than one third of this 30% in the case of loans over R5 000,265 _{and less than one half of this 30% in the case of loans over}

R1 000.266 _{When these costs are annualised and compared with the Usury}

Act maximum rate,267 however, it becomes clear that they are still far too high, despite these reductions.268

261 _{The envisaged maximum cost of credit on a secured bank loan of R20 000, repayable over 36}

months, will be 34,7% per annum. The calculation used is the same as in 6.4.5.2 (d) above.

262 _{The figures indicated below are estimates only based upon the figures in the tables for purposes of}

illustration, and do not purport to be 100% accurate.

263 _{Some 42% in the case of a loan of R20 000, and some 36% in the case of a loan of R30 000,}

compared to 17% per annum in the case of loans in excess of R10 000.

264 _{DTI “Policy Framework” paras 3.4-3.11.} 265 _{Table P, Example 6, and Table Q, Example 4.} 266 _{Table P, Example 4, and Table Q, Example 2.} 267 _{20% per year for loans less than R10 000.}

268 _{The cost of a R1 000 loan will be 168% per year, and the cost of a R5 000 loan will be 108% per year}

(d) The impact of the capping of interest rates on loans between R1 000 and R500 will be minimal. The cost of credit will remain excessive, becoming exorbitant the smaller the loan.269

(e) There will be a negative impact on loans of R500 and less, and credit will become more expensive than the already exorbitant current 30% per month. A loan of R500 will cost 31% per month,270 _{and a loan of R200 will cost 46%}

per month, which is over 50% more than the former 30%.271

(f) One month loans will be much more expensive than other short-term loans. If R500 were to remain the average size of a one month loan,272 _{then 31%}

per month (372% per year) will be the average cost of credit on one month loans, and borrowers will be no better off than they currently are. Even if the average size one month loans were to rise to R1 000 by 2007, then 25% per month (300% per year) will be the average cost of credit on one month loans, which is not much lower. The cost of a one month loan of R5 000 is still 18% per month (216% per year), and the cost of a one month loan of R8 000 is nearly 17% per month (204% per year),273 _{which is excessive.}

(g) For smaller loans of less than about R8 000, the positive impact of capped interest rates will to a large extent be negated by the high maximum initiation and service fees.274 _{This is most marked in the case of the smallest loans: on}

a one month loan of R500,275 _{for example, the monthly interest (R25) will be}

only 16% of the total cost of credit (R154).276 _{On a one month loan of R8 000}

the monthly interest (R400) will be only 30% of the total credit cost (R1 342). For bigger loans the converse occurs, and this is where the initiation and service fees work optimally: on a 36 month loan of R20 000,277 _{for example,}

269 _{Loans between R1000 and R500 will cost between 14% and 31% per month of the initial loan}

amount.

270 _{Table P, Example 2.} 271 _{Table P, Example 1.}

272 _{Ebony “DTI Interest Rate Study” 26.}

273 _{Interest at 5% per month (R400) + initiation fee at R850 + 5% interest (R892) + service fee (R50) =}

total monthly cost of credit (R1 342, or 16,8% per month of initial loan of R8 000).

274 _{Conversely, the negative impact on borrowers of the service fee and initiation fee is obscured by the}

interest rate cap.

275 _{See Table P, Example 2.}

276 _{On a one month loan of R200, the monthly interest (R10) is only 11% of the total cost of credit (R92).}

See Table P, Example 1.

the interest of 38,7% per annum is 92% of the total cost of credit of 42% per annum.

(h) The impact of the initiation and service fees on smaller loans amounts to a skewing of the cost of credit away from interest and towards these fees, so that interest decreases relative to these fees. This skewing has the dangerous effect of masking the true cost of credit from the consumer for the reasons set out in 6.4.4 above, and thereby misleading the consumer. Further, it will inhibit the Act’s objectives of promoting disclosure and combating over-indebtedness.278