The cost of credit

How much is your loan really costing you? Knowing the true cost of credit can save you money.


Credit can open the door to many opportunities and help you achieve your goals. However, it‘s important to remember that credit is never free. 

There are 2 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: 

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

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 that you will pay back more than you borrowed

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

Collection costs: A fee that is 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 3 examples of the cost of credit for someone who got approval for a loan of R100 000 over a 5-year term. The interest rate is 21%.


Paying on time over the 5-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: R68.40 per month (R3 600 in total)

By paying the initiation fee upfront, you can save paying any interest on the  R1 050, helping you reduce your monthly instalment as well as the total cost of credit.


Paying off the loan before the 5-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: R68.40 per month (R3 000 in total)


Taking longer than the 5-year period to repay costs R204 270 in total

What makes up the extra R104 270?

Interest: R99 380 – Unpaid interest is added to the loan amount on a month-to-month basis, on top of the initial interest.

Initiation fee: R1 050

Service fee: R68.40 per month (R3 840 in total)

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

Collection fees: When the credit provider tries to collect outstanding money, they charge an extra fee.

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

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