Understanding Interest: What That Loan Really Costs You

'Only R450 a month' sounds manageable. But how much will you pay back in total, and for how long? Lenders are required to tell you, yet the total cost is often buried in the paperwork. Understanding it can save you thousands of rand.

What is happening

The cost of a loan has several parts. Interest is the price of borrowing, charged as a yearly percentage on the balance you still owe. The initiation fee is a once-off charge for setting up the loan, often added to the amount you borrow so you pay interest on it too. The monthly service fee is charged every month for the life of the loan. Credit life insurance covers the debt if you die, are disabled or lose your job, and is often added to the instalment.

The National Credit Act caps interest rates and fees depending on the type of credit, and lenders must give you a quotation showing the total cost before you sign. You have the right to choose your own credit life insurer if you have suitable cover elsewhere.

Here is an example. Borrow R10 000 over three years at 28% a year. The instalment is about R414 a month, and you repay about R14 900 before fees. Add a monthly service fee and the total can pass R17 000, so you pay back well over one and a half times what you borrowed. Stretch the term longer and the instalment drops, but the total rises further.

The longer the term, the more you pay. The smaller the instalment, the more carefully you should check the total.

Signs to notice

• You compare loans only by the monthly instalment.
• You did not read the pre-agreement quotation.
• You do not know the interest rate on your debts.
• You pay credit life insurance on several loans.
• Your balance hardly moves despite years of payments.

30-second self-check

Answer yes or no.

• Do you know the interest rate on each of your loans and cards?
• Did you get a written quotation before your last loan?
• Do you know the total you will repay on your biggest loan?
• Have you checked whether you pay credit life insurance on each loan?
• Have you compared at least two lenders before borrowing?
• Do you know which of your debts is the most expensive?

0-1 yes: You may be paying far more for credit than you realise. Check your statements and quotations this week.
2-3 yes: You know some of the costs. Filling in the gaps may show you where to save.
4 or more yes: You understand the cost of your credit well. Use that knowledge to pay off the most expensive debt first.

What you can do next

• Today: Find the statement for your biggest loan and note the interest rate, fees, remaining term and balance.
• This week: Use the calculator to work out the total cost of each debt. Check whether you pay credit life insurance you do not need, or could replace with cheaper cover.
• This month: Before any new loan, ask for a written quotation and compare the total cost from at least two registered lenders.
• Remember the in duplum rule: once you are in default, interest and fees added cannot be more than the unpaid balance at that time.

Your tool

True Cost of Credit Calculator - enter the amount, rate, fees and term to see your monthly instalment, the total you will repay and how a shorter term changes the cost.

When to get professional help

If you are paying mostly interest and fees and the balance is not going down, speak to a money coach or NCR-registered debt counsellor. Feeling trapped by debt is exhausting and often affects sleep, and it helps to talk.
Who can help: Money coach, NCR-registered debt counsellor, FSCA-authorised financial planner

Getting help in South Africa

The National Credit Regulator (ncr.org.za) publishes the rules on interest and fee limits, and handles complaints about lenders who break them. You can check that a lender is registered on the NCR website. The Credit Ombud (creditombud.org.za) helps with disputes. Your Cleared Mind EAP can connect you with a money coach.