Your bank can now charge you more interest on your credit card and overdraft, following an increase in the maximum interest rates laid down by the Usury Act.
The Department of Trade and Industry (DTI), which upped the maximum last week by adding four percentage points to the highest interest rate any registered financial institution can charge you, says the new ruling will also affect the cost of your hire purchase transactions.
The only exception is cash lenders who are not registered financial institutions and therefore are exempt from the provisions of the Usury Act. These lenders are still allowed to lend you amounts of up to R6 000 with no ceiling on maximum interest rates.
All other transactions by registered financial institutions under R6 000 are now subject to a maximum interest rate charge of 36 percent. The previous maximum for amounts under R6 000 was 32 percent.
For transactions over R6 000 and up to R500 000, the maximum interest rate charge was 29 percent. It is now 33 percent.
The new maximum charges have been published in the Government Gazette, but they do not constitute a change or amendment to the Usury Act.
The Act stipulates that the Minister of Trade and Industry, Alec Erwin, can direct the Registrar of the Usury Act to determine maximum finance charge rates for different categories of loans.
Alistair Ruiters, the current Registrar, says several factors contributed to the increase in the maximum interest rates.
In the past three months, the prime rate (the overdraft rate which banks charge their best customers) has increased from 20,25 percent to 24 percent. The banking sector raised its interest rates to accommodate the movements in the repurchase rate, also called the repo rate (the key rate at which banks borrow from the Reserve Bank and which replaced the bank rate in March this year).
Fluctuations in the repo rate were attributed to the outflow of short-term capital out of South Africa and the resultant drop in the value of the rand. With the increase in the repo rate, the cost of funds to the banking sector increased.
The increase in the prime rate did not only affect consumers. A large number of retailers who grant you credit were also affected. Some, such as furniture traders, get capital from banks to finance the credit they extend to consumers. The bank finance is often granted to them at rates above prime.
In the case of most transactions, the banks were able to adjust interest rates to accommodate the increase in the repo rate within the confines of the maximum rates set by the Usury Act. But some interest rates were already near to or above the Usury Act ceiling so the DTI decided to raise the ceiling to enable lenders to operate legally.
Ruiters says this applied mostly to overdraft and credit card facilities and leasing transactions. In the furniture trading sector, the maximum interest rates affected mainly hire purchase transactions.
He says many furniture traders, especially smaller companies, are financed by banks for credit transactions at rates above prime, and their margins were increasingly squeezed.
"The danger is that furniture traders and other retailers increase the cash prices of their goods, so those buying with cash subsidise those who buy on credit."
FOR THE RECORD
A reader says he and his wife recently settled both their credit card accounts on the same day. His wife's account was correctly credited on the day it was settled. The following day, the R7 515,27 due on his account was incorrectly credited to his wife's account. Four days later, the respective interest earned and charged due to this error were: his wife earned R8,39 and he was charged R173,99.