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Thursday / 7 November 2024
HomeFeaturesWarning for South Africans wanting to pay off their car loans early

Warning for South Africans wanting to pay off their car loans early

South Africans who want to pay off their car loans before the contract period concludes may be required to pay an early settlement penalty.

This is because National Credit Act (NCA) allows vehicle finance providers to levy an early settlement charge in cases where the original loan was for R250,000 or more.

The act states: “The amount required to settle a credit agreement, in the case of a large agreement, is equal to no more than the interest that would have been payable under the agreement for a period equal to the difference between (aa) three months; and (bb) the period of notice of settlement if any, given by the consumer.”

In simpler terms, this means you could be liable to pay up to three months’ interest at the current interest rate to your finance provider in addition to the outstanding value of your loan, unless you give the company three months’ notice of your intention to settle your account.

As such, if you ask your creditor for an early settlement letter that will allow you to close the contract immediately, the total outstanding amount will generally include an early termination fee.

Paying penalties for good financial management

In a recent Money Show interview, consumer journalist Wendy Knowler spoke of a financially savvy South African couple who put proceeds from their business into paying off their vehicle loan early and they were knocked back to find out that doing so would see them punished with a hefty fine.

The couple bought a Ford Ranger on credit for their new business and contributed an extra R2,000 to the loan repayment every month to speed up the process of paying it off.

When the outstanding balance was finally low enough for them to settle the entire account in one go, they asked their credit provider WesBank for a settlement letter and paid exactly what the letter said down to the cent.

Overjoyed that they were able to do this, they logged onto their WesBank app a few days later just to make sure the balance was still zero and were taken aback to discover that they supposedly owed the bank an “early termination fee” of around R4,100.

They claim this was the first time they have heard of such a fee, and that neither the banking agent nor the termination letter mentioned it.

The couple said their initial efforts to contact WesBank fell on deaf ears. The finance house later got back to them and confirmed that the early termination fee was a fluke and that they had indeed paid all their dues.

However, between when the client first contacted WesBank and the time it provided feedback, they got in touch with Knowler for assistance, who in turn relayed their complaints to the credit provider.

WesBank confirmed to Knowler that there was a “miscommunication” regarding the early settlement of the account as the fine was already included in the fee detailed in the initial settlement letter and that it was actually R2,388.

“The early termination fee was paid as part of the client’s early settlement, and an interest charge of R4,100 was reversed to close the account,” WesBank said.

“This was communicated [to the client] and the account has now been closed.”

While the NCA does not force it to do so, the creditor said that it applies this “discretionary termination fee” to all loans of R250,000 or above.

Knowler therefore advises consumers to give their credit providers at least three months’ notice of their plans to settle their loans if they want to avoid paying such early termination fees.

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