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Which Debt Is The Most Expensive?

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Borrowing money from a bank or credit provider costs money. You must pay back more than you borrow – this is how credit providers make their money. Different types of debt have different costs and some are more expensive than others. It is good to know how much you will pay for the loan you take out.

Obviously there are exceptions but generally there are a few rules of thumb when it comes to the cost of debt. Shorter term debts are usually more expensive than longer term debts. Debts that have an underlying asset attached, such as a car or property, are generally cheaper than unsecured debt.

Who Determines The Cost Of Debt?

The National Credit Regulator (NCR) sets the fee limits. The cost of a loan is determined by your risk as determined by the credit provider. Credit providers use a number of factors, such as your credit report and your credit score, to determine your risk. The riskier you are, the more expensive your loan will be. Credit providers need to be compensated for taking this risk. The risk, of course, is that you will not pay back the loan and the credit provider will suffer a loss.

Here Are The Costs Included In Most Loans

Debt has a number of costs attached to it, not only the interest. These are the costs included in most credit agreements:

  • Service Fee – Credit providers will charge you a monthly service fee for administration costs
  • Interest – You will need to pay a certain percentage of the amount borrowed to the credit provider as the cost of borrowing that money
  • Initiation Fee – A once-off fee in the first month
  • Default Admin Fess – These are charged if you fall behind on payments
  • Collection Costs – A fee charged for the collection of unpaid debts
  • Credit Life Insurance – Many credit providers provide credit life insurance that pays back the debt in the event of death or dread disease

As you can see, the costs of taking a loan can be quite high, especially if the interest rate is high.

Below are the latest maximum interest rates for loans. The current rep rate (RR) in South Africa is 6.75%.

Pay Day/Short-term Loans

A pay day loan is a short-term loan that is usually taken out for 30 days or less. Consumers use these to get through the month if they run out of money before their pay day. Pay day loans are typically the most expensive types of loans. Short-term loans are loans that are taken out for 6 months or less. Pay day and short-term loans have a maximum interest rate of 5% per month for the first loan and drops to 3% for consecutive loans taken out within that calendar year. Effectively this works out to be an annual interest rate of 60%.

Personal Loans

The interest rate of a personal loans is determined by the credit provider based on certain information, some of which is obtained from your credit report. Higher risk clients pay more interest due to the default risk that they pose. The maximum interest rate that can be charged on these credit agreements is RR + 21% = 27.75%.

Credit Facilities (credit cards and store cards)

Credit cards and store cards have a maximum interest rate of RR + 14% = 20.75%. Many South Africans have store cards and use these to buy various products at multiple stores. It is very easy to be granted a store card and usually retailers hook customers in by offering discounts and vouchers for joining their credit program.


Home loans and property loans are usually the cheapest form of credit. The reason for this is that the loan is ‘secured’ by the property, meaning that if the client defaults on too many payment the credit provider, through legal action, will gain the right to sell the property to get the money to pay off the loan. Mortgages have a maximum interest rate of RR = 12% = 18.75%.

Other Fees

The maximum service fee that may be charged on credit agreements has increased from R50 a month to R60 a month (excluding VAT).

Service fees on credit agreements are now capped at R60 (excluding) VAT. Initiation fees are capped as follows:

Mortgages: R1 100 plus 10% of the amount above R10 000, capped at a maximum fee of R5 250.

Credit facilities, personal loans and short-term credit transactions: R165 plus 10% of the amount above R1 000, capped at a maximum fee of R1 050.

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