What a short-term lender may legally charge

Short-term credit is capped per month, not per year, and the limit falls if you take a second loan in the same calendar year.

Short-term credit is the category that covers small loans over a short period, and it is where most payday lending sits. It is capped differently from every other kind of credit, and the difference matters.

A monthly cap, not an annual one

Most credit is capped at the repo rate plus a margin, expressed per year. Short-term credit is not. Regulation 42 sets it at a fixed maximum percentage per month, and that figure does not move when the Reserve Bank changes the repo rate.

A monthly cap sounds smaller than an annual one and is not. A rate charged monthly compounds over a year into a far larger number than the same figure would suggest at first glance, which is why short-term credit is expensive even when it is entirely lawful.

The second loan is capped lower

There is a rule specific to this category that is easy to miss. The maximum rate is lower for a subsequent short-term loan taken within the same calendar year. A borrower who takes several small loans in a year is not entitled to the first-loan rate on each of them.

This is one of the more commonly breached parts of the regulation, precisely because repeat borrowing is normal in this market.

Interest is not the whole cost

The interest cap is only one limit. A short-term lender may also charge an initiation fee and a monthly service fee, both capped separately under different parts of the regulation. An agreement can respect the interest cap and still cost far more than the rate alone suggests.

If the lender is not registered

A lender extending credit as a business must be registered with the National Credit Regulator. An unregistered lender is operating outside the Act regardless of what rate is charged, and that is a matter for the NCR rather than a rate calculation. You can check registration on the NCR's register.

Questions

How much can a payday lender charge in South Africa?

Short-term credit is capped at a fixed maximum percentage per month under Regulation 42, and the cap is lower for a second or later loan in the same calendar year. Interest is capped separately from the initiation fee and monthly service fee, which have their own limits.

Does the repo rate affect a short-term loan's cap?

No. Unlike unsecured credit or a mortgage, the short-term cap is a fixed monthly figure and does not move with the repo rate.

Is the cap lower on a second loan?

Yes. A subsequent short-term loan taken in the same calendar year carries a lower maximum rate than the first. This is a frequently breached rule, because repeat borrowing is common in this market.

What if the lender is not registered with the NCR?

Extending credit as a business without registration is a problem independent of the rate charged. Check the National Credit Regulator's register, and raise it with the NCR if the lender is not on it.

Related

The maximum legal interest rate in South AfricaWhich credit category does your agreement fall into?If you think your interest rate is above the legal limit