Cheaper credit insurance

credit insuranceOn 9 August, the new limits on how much a lender can charge for credit insurance came into effect.

Credit insurance is usually required when taking out a loan; the policy assists in the repayment of the loan if you die, are retrenched or become disabled. For several years City Press has raised the issue of excessive rates charged for credit insurance which adds significantly to the total cost of credit. We reported on a case where a client was paying R288 per month for credit insurance on a R5 000 loan. This worked out to a rate of R56 per R1 000 of credit and made up 40% of the total cost of the loan.

In the last two years the National Credit Regulator (NCR) has referred several large credit providers to the National Consumer Tribunal for the mis-selling of credit insurance policies. These included JD Trading and Lewis.

Consumers will now be charged a maximum of R4.50 per R1 000 of the amount for credit facilities, unsecured loans, developmental credit agreements and other types of credit agreements. When it comes to mortgages, consumers can only be charged a maximum of R2 per R1 000 loan value.  The regulations also highlighted the fact that consumers who are not employed cannot be sold retrenchment cover.

Only applicable to new loans

Lesiba Mashapa, Company Secretary at the NCR says it’s important to note though, that these regulations are not retrospective and only apply to loans issued on or after 9 August 2017.

Although these rates are already in line with the premiums charged by banks, for customers who borrow through micro-lenders, or take finance via a retailer, the cost of credit insurance could come down for new contracts.

For example, if you took a R10 000 loan with a premium of R10 per R1 000, you would be paying R100 per month extra on your repayments for credit insurance. The new rates would mean that if you took that loan after the implementation in August, you would only be paying R45 for insurance, a saving of R55 a month.

For larger credit providers such as the banks, although the proposed rates fall in line with what they already charge, Mashapa says consumers who have existing life cover can use this cover to insure their debts and should not be forced to take out new credit insurance, as long as the life cover is sufficient to cover the debt in case of a claim.

The real impact will be felt by micro-lenders who tend to take on higher-risk customers and whose client base face higher risks of retrenchment, illness and death. Micro-lenders have warned that as they are not able to price effectively for these risks, these loans will no longer be financially viable.

The new rules

  • A maximum of R2 per R1 000 of credit may be charged for mortgages
  • For affordable mortgages of R450 000 or less the same R2 per R1 000 will apply except for customers over the age of 55 who can be charged up to R2.50.
  • All other credit facilities, credit cards, store cards or loans can only charge a maximum monthly premium of R4.50 per R1 000 of credit. However, if the cover provides for the full payment of the loan on temporary disability, then an additional R1 per R1 000 premium may be added

Death or disability: The credit insurance must pay out the outstanding balance in the case of death or permanent disability. In the case of temporary disability, the insurance should cover the monthly instalments up to a maximum of 12 months unless the person is able to work before then.

Retrenchment: If the consumer is retrenched, the insurance should cover instalments up to a maximum of 12 months assuming that the customer has not found employment in that period or that the loan has not been repaid by then.

Only charge for actual risks: If the customer is already disabled then the cost of disability cover may not be included in the premium. If a customer is a pensioner, then the cost of unemployment cover may also not be included in the premium.

Matching risks: If the credit provider charges the maximum allowable rate, the credit provider must be able to demonstrate that the premium is in line with the actual risk presented by the customer. For example a loan repaid over three months would not carry the same risks of something happening to an individual compared to 12 months.

Exclusions: Certain exclusions will be allowed. For example, the cover may exclude events such as suicide and death or injury due to drug or alcohol abuse. Cover may also exclude certain pre-existing conditions. The policy will also only pay out for formal retrenchment and not voluntary retrenchment or resignation.

Choice: Although a credit provider can make credit insurance a requirement of the issuing of the loan, the customer can purchase their own separate credit insurance, however the details must be provided to the credit provider within five days of the loan being issued.

This article first appeared in City Press.

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