The four things you are charged
Interest is charged on the balance you still owe, so it shrinks as you repay. The initiation fee is charged once, when the agreement starts, and is usually added to the loan rather than paid in cash. The service fee is charged every month for as long as the agreement runs. Credit life insurance pays the loan if you die, become disabled or lose your income, and it too is charged monthly.
Only the first of these is what people mean when they talk about the rate. The other three are where a cheap-looking loan becomes an expensive one, particularly on small amounts over short terms, where a fixed fee is a large share of what you borrowed.
The legal limits on each charge
For an unsecured loan, such as an ordinary personal loan, the interest rate may be at most the Reserve Bank's repo rate plus 21% a year: 28.25% while the repo rate is 7.25%. The cap moves when the repo rate moves, and a loan with a variable rate moves with it.
A short-term loan — up to R8 000, repaid within six months — has its own cap: 5% a month on your first such loan in a calendar year and 3% a month on later ones in the same year. Payday loans fall under this rule.
On any loan, the initiation fee may be at most R165 plus 10% of the amount above R1 000, never more than R1 050, and the monthly service fee at most R60. Providers add VAT to the fees. These are ceilings, not prices: a provider may charge less, and what it offers you depends on how it rates the risk of lending to you.
What the limits add up to
The caps let you work out the most a loan can cost. On R3 000 over three months, a short-term lender may charge you at most R1 070.59 in interest, fees and VAT together. On R20 000 over two years, the most is R9 271.17; over four years it rises to R18 115.03, because interest and the service fee run for twice as long.
Our loan cost calculator works this out for any amount and term. Use it to check a quote: an offer that costs more than the legal maximum is not one a registered provider is allowed to make, and you should ask the provider to explain it before you sign anything.
Why you should read the total, not the instalment
A longer term makes the monthly instalment smaller and the total larger. That is not a trick, it is arithmetic, but it is the number providers lead with because it is the number that sounds affordable.
A sensible way to choose is to start from the instalment you can carry comfortably in your tightest month, then pick the shortest term that fits it. If the shortest affordable term is very long, that is a sign to borrow less. Compare offers on the total you repay, and compare that against what you are borrowing: if R5 000 comes back as R8 000, you know what the convenience costs.
The quote you must get before you sign
For a small loan, the provider must give you a pre-agreement statement and quotation before you sign. It shows the amount, the term, the interest rate, every fee, the cost of insurance, the instalment and the total you will repay. The provider must keep to the quoted cost, or a lower one, for five business days, so you have time to compare.
Read the quote against two things: the legal maximum for that amount and term, and the other quotes you have. Check whether the rate is fixed or follows the repo rate, which day the debit order runs, and what a bounced debit order costs. If something on the quote is unclear, ask before you sign; once the agreement is signed, the figures on it are the ones that count.
Credit life insurance
Credit life cover must protect you against death, permanent and temporary disability, and losing your job or your ability to earn an income. Its cost is capped too: at most R4.50 a month for every R1 000 you still owe on most loans. As you repay, the balance falls and so should the premium.
You may use your own policy instead of the provider's if it covers the same events, and the provider must accept it. Very few people do, because nobody tells them. If you already have cover through work or another policy, ask whether it can stand in.
If you fall behind
Missing payments makes a loan more expensive: default interest and collection costs can be added. The law limits how far this can go. While you are in default, the interest, fees, insurance and collection costs that build up may not, together, exceed the unpaid balance at the time you defaulted.
If you can see a missed payment coming, speak to the provider before it happens. Providers can often move a debit order date or agree a short arrangement, and it costs far less than letting the account fall into arrears. If several debts have become more than your income can carry, our guide to debt review explains the legal way out.
Paying it off early
You may settle a credit agreement at any time by paying the outstanding balance, the interest up to that day and any fees already due. The provider must give you a settlement figure when you ask. On small and intermediate loans — which covers almost every personal and short-term loan — there is no penalty for settling early. Only large agreements may carry an early settlement charge, of at most three months' interest.
Extra payments go straight to reducing what you owe, so the interest stops on that part immediately. If your income improves, settling early is usually the highest-return thing you can do with the money.