Do you know whether you have a loan or credit?

Consumer Jane was caught out by a credit agreement in which she thought she had taken out a personal loan. She discovered later that what she had signed up for was a revolving credit facility. A revolving credit facility is very different from a personal loan and is constructed in such a way that you never really pay it off.

In this case, Jane urgently needed to replace her laptop. She made the purchase via Takealot and decided to take the online loan that was advertised by Mobicred. Mobicred is a division of the credit provider RCS and is only available for online purchases.

She received a credit agreement which clearly showed the repayment of the R20 000 loan over 12 months. The agreement showed a monthly instalment of R2 023.93 and a total repayment of R24 287 over the period.

“Although ideally I didn’t want to borrow money to buy the laptop, it was an urgent situation as I needed it for work. But I did my sums and decided that for the extra R4 287 of interest and fees over a year it was worth borrowing the money and having the laptop immediately. I knew that at least in 12 months the laptop would be fully paid for,” says Jane.

So Jane was very surprised when the first debit order went off for R1 982 as this was less than the monthly instalment quoted. The following month the debit order dropped again to R1 820. Jane quickly realised that this meant she was not going to be paying off the R20 000 loan in 12 months.

What Jane did not realise was that although the credit agreement showed the loan repayments over 12 months, as this was a credit facility the credit provider only debited a minimum amount each month in the same way a credit card would.

According to Jason Sive, CEO of Mobicred, “the Mobicred product is a revolving product – identical to a credit card – where a customer pays a flat percentage (10%) of the outstanding balance monthly. Hence the customer does not pay a fixed amount per month. This does result in the facility not paying down in 12 months. However, the National Credit Regulator (section 28) requires a lender to display pricing over a 12-month period. Our revolving credit product is defined as a credit facility.”

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As the repayment formula for a revolving credit facility is to reduce the monthly instalment in line with a reducing balance, it takes many years to actually pay off. In this case, if Jane only made the minimum 10% repayments after three years the laptop would still not be paid off.

Not only would Jane be paying more interest, but the credit provider would still be charging its monthly service fee, in this case R47, which would keep getting added to her balance. After three years she would have paid about R24 000 but the outstanding balance would still be more than R1 400.

Jane asked Mobicred to increase the monthly debit order to the R2 023 quoted in the agreement, but it told her this was not possible. The only solution has been for her to add the difference each month. This requires her to check the debit order amount, as it keeps decreasing, and to top it up.

While Mobicred argues that the product is clearly defined as a credit facility, the reality is that most people are not familiar with the various terms used for loans. It is a rational response for a customer to think that the repayment amounts and period stated in the credit agreement would be the repayment schedule. In fact, nowhere in the credit agreement does it stipulate that only 10% of the balance will be deducted.

Before you sign up for a loan, make sure you fully understand the product and keep track of your monthly debit orders. Revolving credit facilities should be avoided as they are debt traps. If you are already signed up for one, follow Jane’s example and start topping up on the instalments otherwise you will be in debt forever.

Always read through the credit contract as not all terms and conditions are the same. For example, in the Mobicred contract there are a few key clauses to be aware of:

“If your debit order payment day falls on a Saturday, Sunday or recognised South African public holiday, the payment day will automatically be the business day before your usual payment date.”

In other words, if the debit order goes off on the same day as pay day, but one month pay day falls on a Sunday and your employer pays on the Monday, the instalment would have gone off on the Friday before and probably bounced.

“If your account is in arrears, you authorise us (and mandate your bank) to also deduct such arrear amount, as well as any other amount that may be due from time to time by you to us in terms of this agreement, from your bank account through an additional debit order.”

If you miss a payment, or your debit order bounced, the following month they can deduct both instalments without notifying you.

“If you wish to settle your account you must first contact Mobicred to obtain a settlement amount. Settling your account does not automatically mean that your account will be closed.

“If you want to close your account you must contact Mobicred to instruct us to do so.”

This is a very important clause. Don’t think because the balance is paid that the facility is closed. The account will remain open, and incur fees, until you specifically ask for it to be closed.