While all eyes are on the banking industry’s credit expansion, the mass market faces a far greater threat from credit extension by furniture retailers.
According to LifePower, a company that provides financial literacy education to workers, furniture retailers that provide credit, including big brand names such as Joshua Doore and Ellerines, are largely responsible for the debt traps consumers find themselves in. Although retailers are notoriously secretive about the profits they make from their financing operations, analysts estimate that a company like the JD [Joshua Doore] Group makes about 60% to 65% of profits from its financing operations.
Rather than offering the customer an instalment sale that falls under the Usury Act, preventing retailers from charging more than 20% per annum for loans of less than R10 000, they offer the client a micro loan.
Current legislation only requires a credit provider of micro loans to be registered as a micro lender and sets no limits on either interest rates charged or additional fees. LifePower’s research shows that a customer who buys a R2 500 television set at Joshua Doore will pay R1 291 to the retailer in finance fees.
Added to this are the add-ons such as insurance for R1 054, which is compulsory if the customer does not currently have insurance, a contract fee of R90 and, if required, a delivery fee of R200. All of these costs are capitalised and paid over the 24-month period attracting further interest charges.
Retailers such as Ellerines have improved their profits by introducing club membership fees, which add on an extra R310 to the consumer’s bill, again capitalised over the period. If a consumer finances the purchases and takes the extras, that R2 500 television will cost them R4 856.
The impact of credit retailers on indebtness is a real problem, far more than the banks, says Allister Long, MD of LifePower. For example, one company that he consults has about 500 garnishee orders among its 1 100 staff. A garnishee order is a court order allowing a credit provider to attach a portion of the customer’s salary if he or she is defaulting.
Long says these are usually a result of a situation where customers are unable to meet their loan obligations and the goods are reposessed. The goods are sold at a third of their purchase value, the customer no longer has the goods, but still has to repay the outstanding amount not settled by the sale. By now the customer has lost interest and stops paying and legal action is instituted against him or her. Long says South Africa has already seen a 10% increase in summons being issued as higher interest rates and the credit boom start to bite.
According to Nomsa Motshegare of the National Credit Regulator, the entire microlending industry will fall under the new regulator from June 1 2007. There are maximum interest rates that can be charged as initiation fees and service fees are capped. However, these still remain high with providers allowed to charge 5% a month for a short-term loan and a maximum service fee of R50 a month with maximum initiation fees of R1 000.
Mias Strauss of the JD Group says that, apart from the finance charges, all the other fees are options the consumer does not have to take.
He says that the reason the insurance is so expensive is that it is unlimited and no pre-conditions have to be met.
“Due to the risks there are very few insurance companies which could offer this insurance. If a customer already has insurance they are not forced to take our insurance.”
In reality, however, this market seldom has household insurance and would be forced to take the store insurance.
Ironically, the implementation of the National Credit Act will mean that the companies will be able to charge a monthly service fee that they currently are not doing.
Strauss says that because of the additional paperwork that will now be required, the group will be charging a service fee for loans in the future.
The one benefit of the Act, however, is that while the company will charge the insurance premium up front, it will no longer attract interest as it will be structured as a monthly premium.
Consumers will also benefit from the fact that an affordability test will have to be carried out and that the full implications of the loan agreement are explained and the full cost of the loan over the whole period will have to be disclosed.
This disclosure could help prevent over-eager sales people from adding on the “extras” without the customer being fully aware.
The agreement will have to be on one page in the language of the customer.
“The customer will find it easier to shop around for a better deal,” says Motshegare.