Capitec bank has released as series of case studies showing how long it takes the average South African to pay back a R100,000 loan including interest and service fees.
The idea of the report is to provide examples of how quickly credit payment can get out of hand and the typical fees that are added to the outstanding amount.
“Credit can open the door to many opportunities while also helping you achieve your goals, this being said, it‘s important that you know that credit is never free,” Capitec’s report said.
“Paying back your loan on time is a good idea, but paying it back sooner than the agreed period is even better. If you take longer than the loan term to pay back the full amount, there will be extra penalties and fees added, and you’ll end up paying even more.”
There are two main factors that determine the cost of credit: fees and the method you choose to pay back the money.
Credit fees and charges
- Service fee: Credit providers can charge a monthly administration fee.
- Interest: Credit providers charge a percentage of the amount you borrowed as interest, which means that you will pay back more than you borrowed.
- Initiation fee: This is a once-off fee for entering into a credit agreement.
- Default administration charges: Credit providers will charge you extra just to let you know that you are in arrears.
- Collection costs: A fee that is charged for the collection of outstanding debt.
- Credit insurance: Credit insurance covers the provider if death or retrenchment prevents you from repaying the loan.
How you pay back your loan
The below is based on the cost of credit for someone who received approval for a loan of R100,000 over a 5-year term. The interest rate is 21%.
1. Paying the loan on time over the 5-year term, costs R192 376 in total
What makes up the extra R92,376?
- Interest: R87,726 – The amount the credit provider will charge for allowing you to borrow money (21% in this case).
- Initiation fee: R1,050.
- Service fee: R68.40 per month (R3 600 in total).
By paying the initiation fee upfront, you can save paying any interest on the R1,050, helping you reduce your monthly instalment as well as the total cost of credit.
2. Paying off the loan before the 5-year term ends, costs R174 579 in total
What makes up the extra R74,579?
- Interest: R70,529 – By paying more than the minimum monthly instalment, you can repay the loan sooner. If the loan is repaid in 48 months instead of 60, you can save one year’s worth of interest.
- Initiation fee: R1,050
- Service fee: R68.40 per month (R3,000 in total)
3. Taking longer than the 5-year period to repay the loan, costs R204 270 in total
What makes up the extra R104,270?
- Interest: R99,380 – Unpaid interest is added to the loan amount on a month-to-month basis, on top of the initial interest.
- Initiation fee: R1,050.
- Service fee: R68.40 per month (R3,840 in total)
- Defaulting fees: Extra charges are added to the loan amount due to late payment.
- Collection fees: When the credit provider tries to collect outstanding money, they charge an extra fee.