Posts Tagged ‘south african banks’

When compound interest is not in your best interest

These days, there seem to be so many different loan options available to us. Ranging anywhere from 3 month short-term loans, right up to 5 year-long term loans.

Financial institutions make it sound so easy to obtain credit. What they neglect to inform you of though, is how difficult and expensive it is to repay these loans. Giving you the option of extending your loan period may make them sound like they are doing you a huge favour, but in the meanwhile, they are the only ones who are really benefitting from these extended repayment periods by means of extremely high interest rates.

One such loan offer arrived in my mailbox a few days ago, offering me “easy cash for whatever you need it for – now.” They make it sound so easy, in that they will grant you the loan, and you can take anywhere from 24 months to 5 years to repay it.

Upon further investigation, however, I realised that the only people benefitting from this arrangement, would be the loan institution themselves, owing to the extremely exorbitant interest rates they are charging. Yes, the rates may be legal, but they are still absolutely ridiculous, in most cases, requiring you to repay almost double what you initially borrowed, and should you extend your loan repayment period, you will end up paying back more than double what you initially borrowed.

In the small print (don’t we just love how all the really important information is normally classified as “small print?”), it states that interest rates vary between 19% and 26% (compounded monthly), and that the repayment amount is also subject to a monthly service fee, and also does not include a once-off initiation fee, which will vary, depending on the amount of your loan.

Don’t get me wrong, but surely, the amount of work required to process a loan for R10 000/$1334, will be the same as that of a loan for R40 000/$5335? So, in my opinion, why should the initiation fee rise per the amount of your loan? Just another way for the financial institutions to extricate a few more of your hard-earned rands or dollars from you.

I don’t know about you, but to me, this form of loan is the fastest way to ensure that you pay twice for whatever you may be taking the loan for, be it a car, or even for a holiday or anything else. Does the item that you are taking the loan for, really warrant being paid for twice or three times over?

Yes, sometimes, emergencies do happen in life, and a loan is your only option, but always think long and hard, and shop around for different interest rates, before committing to the first offer that lands in your mailbox. There is almost always a better, more cost-effective option available.

Do the words ‘loyal customer’ and ‘excellent credit rating’ no longer count in today’s world?

“What are Virgin Money’s Interest Rates?

Virgin Money charges a variable interest rate that is linked to the repo rate. This means that the interest you pay on your outstanding balance, and also the interest that you earn on a positive balance, changes with the repo rate.

You have up to 25 days at the end of every month to settle your full outstanding balance of swiped purchases. After this you will be charged the rate that applies at the time. Here, is where you need to pay attention as our lawyers have told us that there are different rules that apply to customers who have been contracted under the Usury Act and customers who have been contracted under the National Credit Act that replaced the first mentioned in June 2007. This means that if you have been a customer from before 01 June 2007 your interest rate on an outstanding balance is 18.5% and if you have become a customer after that your interest will be 15.5%.”

I was browsing through one of my bank’s websites, and came across the above mentioned paragraph regarding the legalities/terms and conditions regarding the use of their credit card account. Needless to say, I was shocked. Mind you, I think outraged would be a far more descriptive term.

It would seem like loyalty and an excellent credit rating mean nothing to banking institutions here in South Africa anymore. These days, the customers with excellent credit ratings who pay on time each month, are lumped together with those who skip payments, pay less than minimum payments and who, in general, have shoddy credit records.

As per the pasted paragraph at the beginning of this post, the bank states that customers who have been with them before a certain date, are subject to higher interest rates than customers who have been with them from a later date. In a way, I sense discrimination, as well as generalisation here.

New laws were passed in South Africa during 2007, to apparently protect consumers from unscrupulously high interest rates. But it would seem like it is only intended to protect new consumers. Older consumers seem to be once again, left to fend for themselves regarding high interest rates and bank charges.

So it would seem that this ruling regarding the New Credit Act, or NCA as we know it in South Africa, is discriminatory in a few ways. Firstly, I feel that a person’s credit rating status should at least count for something. Surely, if you have an excellent rating, and your next door neighbour doesn’t, is it really fair that you both get the same interest rate? I think not!

Secondly, surely the banks can see that those who have been with them longer, are obviously happy with them? In that case, it may just be in their best interests to see what they can do to keep their long-standing customers happy. Looks like it’s a case of ‘they’re happy with us, and don’t have many other choices regarding where they do their banking, so we can take as much advantage as possible and there isn’t much they can do about it.’

Although that seems to be the general consensus in South Africa regarding banking. There really aren’t that many banking institutions to choose from, so there is in fact very little competition. At the end of the day, the consumer is the hardest hit by this, because almost every month, the banks here come up with new and creative fees to make money out of us.

We pay for withdrawals at our own atm. We pay to deposit cash at our own atm. We pay to deposit change into our bank accounts. We pay for the privilege of simply having a checking account (yes, horror of horrors, there is no such thing as ING here to offer us a free checking account). Most credit cards here have an annual fee. I know of only one that doesn’t.

Banks here make a big issue about telling you that they don’t charge you swipe fees on credit cards, but what they don’t tell you is that if you don’t read the small print, they will find other ways to swipe your money from you.

Feel free to post comments…

My debt is on diet and the truth about South African banking institutions

As mentioned in earlier posts, the idea of this blog was to share ideas with others with regards on how to save money, as well as encourage those who are also trying to pay off debt, but are feeling discouraged, because the small payments you make, seldom seem to ‘get you anywhere.’ All posts on this site stem from my own experiences with regards to paying off debt, and saving money (the humourous posts stem from my own personal experiences too, but we won’t go there right now)!

To be honest, I would feel like a total hypocrite if I were here blogging, and telling others how to save and pay off debt, if I wasn’t doing it myself. December has been successful month number two of not touching any form of credit whatsoever, and I have fantabulous results to show for it with regards to getting the debt paid down. Credit card debt on 6 November 2009: $1320 Credit card debt on 29 December 2009: $1048.  I know… $272 doesn’t seem like a heck of a dent in the outstanding amount, but it’s pretty relative, when one stops to think what we earn in South Africa, compared to our counterparts in the good ol’ US of A. My current salary folks (hold on to your seats and cling to your monitors), amounts to a paltry $1.84/hour, or $16.50 a day after tax, medical expenses and retirement savings have been paid.

So there is definitely not a lot left after everything has been paid out for the month, yet I aim to save the approximate $187/month payment that I currently make on the credit card debt, either in a normal savings account, or in another retirement policy. Depends on where I will get a better return at the time of investment. $187 is my currently budgeted amount to repay each month, but there are times where I have no spend days (which has been happening fairly often lately), so anything not spent at the end of each week, is also being transferred into the credit card which is being paid down. This is often referred to as the snowflake or snowball method of paying down debt, and I can guarantee that every penny helps.

The banks really hate it when you pay down more than the minimum payment, because this means that they are making far less money out of you than initially planned. But my take on this is that they have made enough money out of me over the years, so now it’s my turn to make money out of them for a change! The sad truth here in South Africa though, is that banks here bill you for absolutely every little thing. We have no such thing as free checking accounts, and most banks bill you for each and every time you swipe your checking card at the supermarket, or anywhere else. The other shocker is that the cost of the swipe transaction fee varies – depending on the cost of your purchases! Most credit cards on offer here carry hefty annual card fees. In fact, the only one that doesn’t, which I have since switched over to, is the Virgin Credit Card, which I currently use as a savings account, owing to the fact that if offers a rather nice interest rate of 4.5%.

When one applies for a loan of any type here, be prepared to repay well over 100% in total interest and fees on it, even if paid back earlier than anticipated. Should you wish to settle a loan early here, most banking institutions insist on being given at least 90 days notice in this regard! An example of just how expensive it is to purchase property here:

Amount of bond taken out with banking institution: $200,000

Interest rate: 10,5%

Repayment period: 20 years/240 monthly payments

Monthly installment: $1996

Total repaid in respect of loan: a whopping $479,040!

That means you will have forked out an additional $279,040 of your hard earned money in interest charges over 20 years! I don’t know about you, but my plan is to find ways to earn additional income, so that I can ideally pay cash for a home someday. It doesn’t have to be the largest home in the neighbourhood, but to me, it will be home, and it will honestly be my own, because I will not owe a penny to the bank for it. As long as there is enough space to maintain an organic fruit and vegetable garden, I will be a happy woman. The same will go for a vehicle when the time comes to replace my current one.

Some may disagree with me, but in general, many will agree, in that buying a new vehicle, is pretty much a waste of good money, when a demo or repo model can be had for substantially less. Or (drumroll please)…used. A used vehicle never hurt anyone (provided it is purchased from a reputable dealer), and will save you a substantial amount of cash. Oh, and by the way, the same example used above regarding a home loan, is pretty much applicable to purchasing a vehicle here in South Africa. You end up paying well over double the initial cost of the vehicle at the end of the loan period.

Credit card interest rates are also phenomenal here, ranging from 16.5% to a whopping 28%, depending which bank your card is with. The really screwed up scenario with the bank I am currently paying the credit card debt to, charges 16.5% interest on amounts of $1334 or higher, but the moment you owe them less than that, they hike your interest up to a whopping 19.5%! What gives me the idea that they don’t want people to pay down their debt?? The real shocker is that, when I called them up to try to negotiate a better interest rate, owing to the fact that I’m an excellent client, their response was, “Our rates are not negotiable.” Something tells me that they can’t be too hard up with regards to trying to keep existing customers.

Needless to say, once the balance I owe them is paid up, I will be shopping around for an alternative banking institution – one that treats their clients like people and not numbers in their ledger book. Ever wondered why they are referred to as banking institutions? Most institutions I know of, are generally for insane, or somewhat…intellectually challenged individuals…need we say more?

Does your bank bill you for every single transaction? Do they also charge you a flat monthly rate simply for the privilege of having an account with them? I’d love to hear from you. Feel free to post comments below.