How much does your loan really cost you? Here’s how to work it out

SPONSORED | Knowing the true cost of credit can save you money. Here’s how.

Credit can open the door to many opportunities while helping you achieve your goals. That being said, it’s important that you know that credit is never free.

There are two main factors that determine the cost of credit:

1. Credit fees and charges

Make sure you know what fees and charges your credit provider adds to your total repayment. Here are some examples:

Service fee: Credit providers can charge a monthly administration fee.

Interest: Credit providers charge a percentage of the amount you borrowed as interest, which means you will pay back more than you borrowed.

Initiation fee: This is a one-off fee for entering into a credit agreement.

Default administration charges: Credit providers will charge you extra just to let you know that you are in arrears.

Collection costs: A fee charged for the collection of outstanding debt.

Credit insurance: Credit insurance covers the provider if death or retrenchment prevents you from repaying the loan.

2.How you pay back your loan

Paying back your loan on time is a good idea, but paying it back sooner than the agreed period is even better. If you take longer than the loan term to pay back the full amount, there will be extra penalties and fees added, and you’ll end up paying even more.

Let’s look at three examples of the cost of credit for someone who has approval for a loan of R100,000 over a five-year term. The interest rate is 21%.

Paying the loan on time over the five-year term costs R192,376 in total.

What makes up the extra R92,376?

Interest: R87,726 (the amount the credit provider will charge for allowing you to borrow money – 21% in this case)

Initiation fee: R1,050

Service fee: R60 per month (R3,600 in total)

By paying the initiation fee up front, you can save on paying any interest on the R1,050, helping you to reduce your monthly instalment and the total cost of credit.

Paying off the loan before the five-year term ends costs R174 579 in total.

What makes up the extra R74,579?

Interest: R70,529 (by paying more than the minimum monthly instalment, you can repay the loan sooner; if the loan is repaid in 48 months instead of 60, you can save one year’s worth of interest)

Initiation fee: R1,050

Service fee: R60 per month (R2,880 in total)

Taking longer than the five-year period to repay the loan costs R204,270 in total.

What makes up the extra R104,270?

Interest: R99 380 (unpaid interest is added to the loan amount month to month, on top of the initial interest)

Initiation fee: R1,050

Service fee: R60 per month (R3,840 in total)

Defaulting fees: Extra charges added to the loan amount due to late payment

Collection fees: Charged when the credit provider tries to collect outstanding money

By being aware of the costs involved with credit, you can work out your affordability and become good for credit.

This article was paid for by Capitec.