The recent Viceroy report has drawn a lot of attention regarding Capitec’s financial reporting and its lending practices (Loan Rescheduling). The report presented several allegations against Capitec. One of the allegations is around loan rescheduling and this is particularly relevant to consumers. Vantage has concluded 3 things you should know about loan rescheduling with examples.
For all examples below,we assumed an interest rate of 28%. The examples are not based on real consumers.
What is a loan reschedule?
Loan rescheduling is using a new loan to replace the outstanding balance on an older loan. The new loan is typically paid over a much longer period with a lower instalment. Loan rescheduling is mainly used to avoid default from consumers. In this case, Capitec is accused of progressively convincing its customers to reschedule their loans.
For example, John owes R50 000 and he needs to pay R2 745 over 24 months. When John feels he is not able to make the payment, he approaches the bank and explains his situation. The bank decides to reschedule the loan for John by giving a new loan for R60,000 over 6o months and then John only needs to pay R1 869 per month. The new loan will firstly pay off the old loan and John will get a lump-sum of around R8900 after all the fees.
Loan Rescheduling is more expensive for you in a long term
Although loan rescheduling give a temporary relief to consumers, the long term cost is very high.
For the old loan that John had, John needs to pay R2 745*24= R65 866 in total, R50 000 is the principal debt and R15 866 is the interest cost.
After the loan gets rescheduled, John needs to pay R1 869*60=R112 088 in total, R60 000 is the principal debt and the interest cost is R52088!
This means the rescheduled loan puts a customer in more debt. John has to carry the loan cost for the next 5 years with a high interest rate. Read more about consolidation loans.
Why loan rescheduling may not be ideal for you?
High long term cost
A loan reschedule mostly happens when a consumer cannot afford current debt repayment. This means the consumer is experiencing financial difficulties. What the consumer needs is a method to reduce the debt instead of getting more debt.
When a loan gets rescheduled, you are liable for all the fees associated with it. When John’s loan gets rescheduled, he needs to use the new loan to pay for the initiations fee of R1 050. The fee will either be deducted from the loan payment or added to the principal debt.
Vicious Debt Cycle
After the reschedule, the loan John has will become a long term loan. This means the balance of the loan will reduce very slowly on a monthly basis. In addition, if John experiences financial difficulty again and he is not able to make the payment for the loan, the balance will start to increase due to its high interest. In other words, this loan becomes an unpredictable bomb which may explode at any time.
You May Not be Able to Afford
It is generally not a good practice for banks to offer a new loan to customers who cannot afford the current ones. When you are offered a loan reschedule, please consider whether you are able to afford it before making an irrational decision.
Make Informed Decisions
In conclusion, it is important for consumers to understand the full implication of loan reschedule in order to make an informed decision. As the solution may not be suitable for you.
If you need advice regarding your debt, you can contact Vantage for a free debt assessment.
Please note that this article does not aim to establish on any conclusion on the content of the report.