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Are banks routinely overcharging on vehicle loans in arrears?

‘Thousands of vehicles are being repossessed each year based on false figures.’

Eight years ago debt counsellor Fanie Grové started looking at vehicle loan statements from his clients and was staggered by what he saw: in every one of more than 80 cases he examined where the borrower had fallen into arrears, he says the bank was unlawfully overcharging interest  – even by just a few days.

In some cases, the overcharge was 40-50% more than the interest allowable in terms of the National Credit Act (NCA), says Grové.

Considering the number of vehicles sold in SA each year – 557 000 last year alone – the implications could be huge. Wesbank, the market leader, reported R2.6 billion in profits from its SA retail activities last year.

The matter was raised with the National Credit Regulator in 2014 over a Standard Bank customer who missed some monthly payments in 2013. The NCR took the view that the bank was not in violation of the NCA and that it had calculated the interest correctly – despite the fact that the bank later reduced the loan amount payable by the client. The NCR’s dismissal of the case is puzzling to some in the debt industry. An actuary who reconstructed the bank statements and applied what he says is the correct interest charge found that the bank had overcharged the customer by 40%.

Standard Bank spokesman Ross Lindstrom says charging interest on interest when a client falls into arrears on a vehicle loan is “in line with the contractual agreement, which complies with all relevant legislative requirements.”

Why did the bank then reduce the client’s loan amount? Is this not an admission of wrongdoing? “Definitely not an admission of any wrongdoing, as this was an attempt by Standard Bank to assist the customer,” says Lindstrom.

The facts are as follows: the client purchased the vehicle through Standard Bank in 2008 for roughly R110 000 and kept up with the instalments for several years. In 2011 he noticed that the outstanding balance on the loan was R203 000, despite having paid R90 000 in monthly repayments. In other words, despite paying off the loan for three years, his statement suggested his outstanding balance had not reduced.

Before 2013, the client had started missing the odd payment. The bank added the arrears amount to the amount outstanding, but here’s where the problem entered, says Grové “A portion of every instalment goes to repay the capital and a portion to repaying interest. In the early stages of a loan term, most of the repayment goes to repaying interest. The problem arises when the client falls into arrears. The arrears amount is added to the outstanding balance. The banks have been charging interest on the arrears, which already includes an interest charge. A plain reading of the law suggests they cannot do this.”

Given the compounding effect of interest, Grové says the difference between what banks are claiming and what is allowable under the law can be huge – more than 40% in the case of the client referred to the NCR in 2014.

Grové looked at more than 80 vehicle loans where the client had fallen into arrears, even for just a few days, and found the same errors in all cases: “Sadly, we are not getting any joy from the regulator, or we have not sufficiently explained how the overcharging works in practice, but if you extrapolate this over the entire universe of vehicle finance sales, we are talking about potentially billions of rands in overcharges spanning back through the years.”

Forensic accountant Andre Prakke came to the same conclusion as Grové after looking at his evidence and that of some of his own clients, though he ascribes the errors to a fault in banks’ systems. The National Credit Act is not specific enough on how to calculate interest payments on arrears – but not everyone believes the banks are entirely innocent.  

When financing cars, banks calculate the vehicle cost, plus financing charges over the life of the loan, divided by the number of instalments. So, for example, a R100 000 car financed over 36 months has a total cost of say R150 000. This is divided by 36, giving a monthly instalment of R4 166. This instalment includes a capital portion and an interest portion. The interest portion is calculated based on the full term of the loan. To now add an arrears instalment to the outstanding balance and again charge interest on this amounts to what some believe is ‘double dipping’: charging twice for the same thing.

This becomes more prejudicial when the borrower misses several instalments: “The net effect is that the balance that is owing is not calculated according to the interest rate that is specified in terms of the contract entered with the finance house,” says Prakke. “There will be a portion of simple interest and compound interest.”

Things get further out of hand when the case is handed over to the legal department, and collection and legal costs are added. Legal costs are untaxed [unverified], but banks and their lawyers get away with these charges because so few people contest these matters in court. Says Prakke: “The debtor is already so battered that they will not even be able to look at this issue, and there is no place where they can get assistance.”

Prakke says it gets worse still when insurance premiums are debited. Not only does the finance house get a commission on the insurance, but interest is also calculated on the total premium, including the finance house’s commission. These are sometimes debited sporadically, resulting in automatic interest costs to the borrower, through no fault of their own.

All these ‘little’ additions add up to a tidy sum. 

Leonard Benjamin, a legal consultant in the debt industry, agrees: “We may need a high court test case to get the judiciary to adjudicate on this matter since a plain reading of the NCA makes it clear that banks are charging interest on arrears instalments incorrectly.”

Grové says thousands of vehicles may be repossessed unlawfully each year due to the incorrect charging of interest on arrears by the banks. Banks are also accused of sending out repossession agents to recover vehicles without the necessary writ of attachment issued by a court. Grové says one client who was in arrears on his vehicle loan had his car repossessed by a sheriff and sold two days later – all without a writ of attachment, as required by law.

Benjamin advises never to surrender a vehicle to anyone claiming to represent the bank unless they have a valid writ of attachment, signed by a judge and stamped by the court. 

“Section 127 of the NCA deals with the voluntary surrender of goods that have been attached by a court. If you are approached by a sheriff, ask to see his appointment card and politely ask to take a photo of it. Even then, you are under no obligation to surrender the car. They will attempt to get you to sign a voluntary surrender document, but the NCA makes it clear that the act of voluntary surrender must be initiated by the debtor,” says Benjamin.

“There are a lot of so-called repo agents running around pretending to be sheriffs and earning R4 500 to R5 000 for every vehicle they repossess. In such a case, I would again ask to take a photo of their appointment card, record the conversation, and then politely refuse to hand over the car. Only a sheriff is authorised to repossess the vehicle, provided he has a valid court order. The recorded conversation can then be sent to the bank so they know who is purporting to represent them.

“Before surrendering the car, I would want to do a forensic audit of the bank statements to make sure interest is not being charged incorrectly. There are too many errors, deliberate or otherwise, in these bank statements.”

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So what happen when you deposit money to the bank snd your capital earn interest and you earn interest on interest ie compounding?
What is good for the depositor is good for the borrower

No it is not . Compounding interest on an investment is part of the product. Compound interest on loans is the nett effect of a declining loan. As an exbanker I know the system is flawed. I have done these calculations quite a few times for clients and this article is spot on – we need a high court test case. There is nothing wrong with charging interest on amounts payable and not paid but it can only be for the period it was not paid on the amount not paid. The banks systems does not do that on vehicle loans.

The abuse of interest charges is much wider that it is visible, municipality bills, mortgage repayments, unsecured loans, store accounts, cellphone contracts, etc etc…. the issue is; Interest charging is a science less understood by business and abused by the finance departments within businesses…

When will the banks learn. Greed is not the way. Just the other day the banks got grilled about their home loans practices and ethics. Is there no ethics in the management structure of the banks.?? Is there no ethics in th3 directors of the banks?? Do the banks have to be dragged through the courts yet again to show how unethical they are? Greed and more greed!!

Banks have lost all credibility and respect that they enjoyed 30+ years ago. In line with SA politics.

I think I am missing something. This article seems to cherry pick some opinions and doesn’t attempt to actually analise the problem. Since no effort was done to truly illustrate the “problem” I can’t really decide if there is an issue here.
The explanation of how the loan works also doesn’t seem right? I have been able to pay a car loan of quicker and get reduction on payments when I overpay. Then again, I use IEMAS, not Wesbank. Maybe there is a difference?
Please provide the calculations the people cited in the article uses. I would love to do my own calc.

I have not been in arrears but I settled a car loan the other day and asked for a full recon from inception, what they sent me was a mess and quite hard to reconcile because there was everything from warranties purchased at inception of the loan to strange interest calculations.

Once I decoded it, it was mostly right but there was some errors which they pretty much refused to correct.

That is perhaps the problem, I suspect most of these loans are calculated correctly but you have to speak to quite a senior person to decode what is happening on your statement. I had the same thing happen but far worse with my parents home loan a whole back, ABSA could not explain 50% of the statement to me, crazy.

I know some of the Agents that work for one of the leading finance house, and let me tell you – if they go after your car it doesn’t matter what you ask for (be the sheriff letter or their cards) at the end of the day they will get that car. All they have in their mind its that handsome commission. Some they go to the extend of being aggressive and you can call the bank all you want but your car they will be taking with on the day. The finance house give them targets weekly and if they don’t reach that so goes their commision

Finance house don’t care about their customers at all. Its a sad reality.

Vehicle sales are not the only fees being overcharged. In an era of digital record keeping and reporting, in essence, much of the banks “service” delivery is undertaken at the push of a button and programatic processes. Yet charges bear no direct relation to productive effort but are most often related to the quantum of the transaction or to specific report description. So in the case of ATM transactions for example, charges are levied on a questionable scale based on the value of the withdrawal, but even that is a rip off. In the case of cash deposits for instance, hypothetically, R1 – R50 deposit might attract a charge of R5 then the next band might be R10.01 – R100 with a charge of 7.50, so if one had to deposit R10.01, the extra cent would incur a cost of R2.50 in charges.
Although these are not the actual charges levied, which I don;t have at hand, the principle is demonstrated. This thinking applies to all charging bases which are totally non transparent and literally a licence to print money, No wonder charges have been escalating at rates which provide obscene sums of revenue relative to the true direct costs of service delivery.
One has only to read the research done by Michael Hudson and imparted in his book “Killing The Host”, where he explains how the “FIRE” grouping of economic sectors, (Finance, Insurance and Real Estate”, which are all rent seekers, are responsible for the obscene accumulation of wealth at the expense of activities in the real economy and are in fact bleeding productive funding away from real investment into the hands of this grouping. Worse still despite this, it is the convention to include their output is as part of a countriy’s GNP, whereas it should be more accurately regarded as an overhead cost and controlled as such.This treatment is the biggest most blatant scam ever perpetrated on economies and has contributed directly not only to the increased penury of individual citizens, but indeed to the virtual collapse of entire countries as is evidenced by Greece and others. The whole system is predicated on the creation of compounding debt and diverts capital away from the real economy into the pockets of rent seekers and financial manipulators, to the point where 90% of the wealth is controlled by 1% of an elite. It is disgraceful and mathematically unsustaiable and needs radical change where money growth is tied more directly to real productivity growth.

Glad to see other people are also reading Michael Hudson. Very disconcerting how people are left thinking the banks are doing them a huge favour, when it is them that are being bled dry.

i am actually facing the above situation right now. a few years ago things got financially difficult and i went under debt review but then i realised all the fees i am paying through debt review i could add to my accounts, long story short, i contacted my vehicle financed bank and had my account restructured. from my understanding when an account is restructured they should take your current balance, current balance of interest due, add further interest on the current capital for the new payment term and give you an instalment for a set period (new restructured to be paid off and settled over the term). what my “wonderful” vehicle finance bank has done: added the new interest for the new term, added over R55 000.00 arrear instalment onto the capital balance, added a residual of R116000 (one hundred and sixteen thousand) as a second last payment of which i had no clue until last month when i called in to increase my instalments. the bank has once again, without my consent, further restructured my account to add another 56 months…. my account is a mess and no one is prepared to listen to what i am saying. I cannot see how a bank can add arrear instalments onto a capital balance? it is like saying if i owe you R500 and my instalments are R100 per month plus interest and i don’t pay the first month then it is said that i owe R600 plus interest… sorry for the long reply but i just need help!

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