The real cost of a personal loan

Michael wonders whether it’s legal for a bank to charge more than double the amount of his personal loan.

personal-loan“I recently applied for a personal loan of R79 000 to buy a car as I did not qualify for car finance due to a poor credit record. After costs, the total value of the loan came to R80 000. The loan will be paid off over five years at R3 100 per month and the total repayments come to R190 000 – which is more than double the original loan. Is this legal under the National Credit Act?” asks Michael.

Maya replies: The short answer is yes. The limits set by the National Credit Act allow for upfront initiation fees, service fees and an interest rate of up to 32.1% per annum which means that over five years your interest and costs can exceed your initial loan.

Your experience highlights the importance and value of a good credit record. The default rate for car finance is 14.5% (this could be lower based on credit history). If you qualified for this rate your repayment would be R2 000 per month with a total repayment of R120 000.

Instead, due to your poor credit record, the bank has deemed you high risk and charged you the maximum interest rate which is effectively costing you an additional R70 000 – nearly the value of the car!

Now is your chance to change your credit profile. Rather than pay over all that unnecessary money to the bank, save up towards the car and avoid the expensive debt. If you saved the monthly repayment of R3 100 per month you could buy a car with cash within two years, have no debt and your savings history would improve your credit rating with the bank. You will also never have to worry about the bank repossessing your car.

Whenever you take on debt be aware of the real cost of missing payments or not being able to repay your debts. Make sure you get your annual free credit check from the credit bureaus: Experian, Compuscan, Transunion and XDS. Websites like www.credithealth.co.za offer consolidated reports for R89.

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