Interest rate caps may not be good news

The Department of Trade and Industry (DTI) has released a review of the limitations of fees and interest rates regulations. This document follows from the draft regulations on the review of limitations on fees and interest rates that was released in June for public comment.
 
The regulations provide for maximum prescribed interest rates for different types of credit agreements, as well as maximum initiation fees.
 
However, debt counselling company DebtBusters, noted: “While the proposed cap on interest rates and initiation fees for credit agreements is a necessary one for consumers, it could have a negative impact on lenders, making it even more difficult for borrowers to obtain loans in the future. Those that have become dependent on short-term loans for survival will surely reach a ‘debt end’ very soon.”
 
The maximum rates and fees
 
According to the DTI, the maximum prescribed interest rate that lenders can charge for the various types of credit are as follows:
 

Credit type	Maximum prescribed interest rate
Mortgage agreements	Repo Rate (RR) + 12% per year
Credit facilities	RR + 14% per year
Unsecured credit transactions	RR + 21% per year
Developmental credit agreements (Including small business and low income housing)	RR + 27% per year
Short term transactions	5% per month on the first loan; 3% per month on subsequent loans within a calendar year
Incidental credit agreements	2% per month
Other credit agreements	RR + 17% per year

Source: Review of the limitations of fees and interest rates regulations
 
Amendments to the maximum initiation fees that can be charged on credit agreements have also been presented in the review. The regulations note: “An initiation fee must only be charged when a new credit agreement is established with a consumer and must not be charged on a transactional basis where there is no new credit agreement with the consumer.”
 
The prescribed maximum initiation fees are as follows:
 

Credit type	Maximum initiation fee
Mortgage agreements	R1 100 per credit agreement + 10% of the amount in excess of R10 000. But never to exceed R5 250.
Credit facilities	R165 per credit agreement + 10% of the amount in excess of R1 000. But never to exceed R1 050.
Unsecured credit transactions	R165 per credit agreement + 10% of the amount in excess of R1 000. But never to exceed R1 050.
Developmental credit agreements: A.      Small business development       B.      Low income housing (unsecured)	A.      R275 per credit agreement + 10% of the amount in excess of R1 000. But never to exceed R2 600.   B.      R550 per credit agreement + 10% of the amount in excess of R1 000. But never to exceed R2 600.
Short term transactions	R165 per credit agreement + 10% of the amount in excess of R1 000. But never to exceed R1 050.
Incidental credit agreements	Nil.
Other credit agreements	R165 per credit agreement + 10% of the amount in excess of R1 000. But never to exceed R1 050.

Source: Review of the limitations of fees and interest rates regulations
 
In addition to the above maximum rates and fees, the DTI has also imposed a maximum monthly service fee of R60. The regulations explained: “The service fee covers that cost of administering a credit agreement which is the operational cost of the credit provider such as rent, labour, communication, banking, processing repayments and any other costs related to the administration of a credit agreement.”
 
Furthermore, the regulations pointed out that the service fee must be charged for a calendar month in which it is due and payable and on a pro rata basis where the credit agreement was concluded during the course of that calendar month.
 
What does this mean for consumers?
 
Ian Wason, CEO of DebtBusters, stated: “Now, with the new interest rate caps, lenders can be expected to scale back even further on lending to cut back on risks and costs, resulting in even fewer people qualifying for loans.
 
“While low risk consumers should be paying less in interest and fees, lenders will be using more stringent risk models to evaluate customers’ creditworthiness. As soon as the new Limitations on Fees and Interest Rates regulations come into effect (6 months from now), lenders will be taking on more risk for less money and are bound to decline riskier borrowers.”
 
Wason added: “In the past, lenders had the ability to charge as much as 33.2% for unsecured loans. Now that they are being forced to reduce that to 27% (based on the current repo rate), they may get far more selective in whom they lend money to. This could drive more people toward loan sharks and other unaccredited lenders in order to make ends meet. Often, these fringe players don’t adhere to the National Credit Act and the Debt Counselling Rules System (DCRS), so the NCR (National Credit Regulator) will really need to police this,” said Wason. 
 
Another thing for people to keep in mind is the Repo Rate announced that is due later this month, with many expecting an increase to be announced. This increase would mean that the maximum interest rate caps will increase.
 
In addition, Wason noted that rising food costs and expected electricity increases next year (2016) could lead consumers to find themselves in financial strain where they will no longer be able to borrow money to pay off existing debts.
 
According to the DTI, “these regulations will come into effect six months after the date of publication,” which was 6 November 2015.
 
To read the full review of the limitations of fees and interest rates regulations, click here.