An estimated eight in 10 South Africans say their household income has been negatively affected by the Covid-19 pandemic and about 90% of them are concerned about their ability to pay their existing loans and bills. If the economy does not kick back into gear soon, that inability to service debt is likely to worsen.
Banks have stepped up to assist customers, by offering payment holidays as temporary relief without negatively affecting their credit scores at the credit bureaus, but the assistance has been limited to only those already in good standing. Banks have also encouraged customers to claim for relief through their credit life insurance, but with strict terms attached to the insurance, the self-employed and commission earners do not qualify.
While payment holidays might offer some temporary reprieve, they have a nasty effect by increasing the cost of your loan in the long term: the payment term is extended, while account fees and interest continue to accrue so you’re paying interest upon interest.
One bank has come up with a unique solution for its clients, by offering a cost-effective cash flow relief plan, as a separate credit agreement.
Savvy customers have been wary about the offering, viewing this as yet another way to encourage indebtedness.
One wrote that with the current lockdown, his wife had been placed on unpaid leave for the lockdown period and will not be paid a salary – nor is she likely to have a job once it is over.
“She might get something out from the UIF. However, it will be a drop in the ocean and when it will payout, no one knows,” Shaun Matthews said.
“We sent a request to FNB through their Covid-19 process, and instead of activating the credit protection plan, to cover the loss of income, they have now replied with an option for another loan, to cover the next three months’ payments, payable over an extended period with no service fees but charged at prime interest rate.”
Matthews said it feels like reckless lending, as the bank is giving new loans to people who technically have no income, and a number of people are likely to end up having no jobs or income by the end of April as well.
Another reader, who is in the financial sector and preferred to remain anonymous, said all FNB is essentially offering is a loan, so more debt. “It is by no means a payment holiday, but a debt trap,” he said, having applied for payment relief for his bond.
The reader said his staff, who had all been placed on short-time, were also interested in their banks’ payment holidays, but he warned them about the compounding effect on interest and the dangers of taking on more credit during such uncertain times.
I spoke to FNB about the loans and concerns about reckless lending.
Doret Jooste, the CEO of Retail Money Management, says their solution was designed to be less expensive than the typical industry solution with term extensions, where customers end up paying “interest upon interest”.
Jooste says instead of extending the customer’s term (under an existing product), FNB’s payment break solution allows them to repay this amount in a separate credit agreement after the three-month payment break. This translates into zero fees; the interest rate is set at prime, which is likely to be far lower than what customers are currently paying on their unsecured credit products such as personal loans, credit cards or overdraft; the repayment term is flexible, and repayment only starts once the three-month relief period expires – so, for example, if customers take up the offer at the end of June, they will only need to start repayment at the end of September.
“Payment holidays sound quite nice,” Jooste says. “Customers view it as almost free. But these are three-month breaks and it’s not as simple as extending the term. It means that interest is compounded, so in the long term, they will be worse off.”
As an example, a R100 000 personal loan with an 18% interest rate is payable over 48 months. With monthly payments of R2,937, a three-month payment break would add an extra four months onto the term. The additional cost of credit due to that extension is R9,636, so in total, the customer ends up paying a total of R150,636. With FNB’s payment break solution, charged at 7.75% interest, the cost is R1,845, and the customer pays back a total of R132,187.
FNB, she explains, is offering a client-based solution, so customers don’t have to make arrangements for all their products.
“It’s a separate credit agreement, and we can enforce very favourable terms. Credit cards and personal loans usually attract very high interest.”
Jooste says they do expect to see some impairment, but it’s to be expected as a result of the lockdown. “This is not a profiteering exercise. We want to minimise the impact of the pandemic on our clients.”
Dawid Spangenberg, head of credit at FNB, says technically, this is a new credit agreement, but it is not credit in the sense that it gives customers cash. “It’s not like a normal personal loan. It just services existing debt commitments. We’re definitely not using it as a marketing opportunity to increase indebtedness.”
Spangenberg says FNB was especially worried about vulnerable customers with unsecured debt: “That debt can run away, so we want to make the loan affordable, at a lower interest rate.
For some customers, three-month relief will not be sufficient, and we don’t want to ask customers to pay us while they’re affected. This is purely to facilitate affordable relief.”
To date, FNB and WesBank have approved payment breaks on more than 500,000 agreements worth over R4.3-billion.