I’ve written about high interest rates in Lesotho and South Africa before and there are also examples of them in the UK. I am not against them per se – I think that short term loans at high interest rates are useful for people – especially in developing countries. There tend to be low transaction costs and easy access. You don’t need to travel for a day to get to your nearest town, complete long formal processes with a registered financial institution only to find you get rejected or, if you are successful, spend another day going back to repay the loan a few weeks or months later. Instead you have access to funds you desperately need from someone in your village or a nearby village. The cost in terms of time and effort is low – you can spend that time working in the fields or repairing the house instead.
However, I saw an advert on South African television last night. I will have to do some rounding, but approximately, you can buy a new laptop for around R350 per month over 30 months – that works out at R10,500 (about $1,400). The advert didn’t really give the specifications but that seems expensive to me, even if we discount it by (amongst other things) inflation over the next 30 months.
However, the advert did also say that if you pay up front you can pay just R6,000 (about $800) – bargain!
For me, that implies some (fairly high) positive rate of interest*, but the advert claimed that the interest rate is 0%. Unbelievable! How can they get away with that?
I don’t know what the law says, but I think that it depends upon the framing. If you frame the cost as being R350 per month over 30 months, then that is the cost – and there is no interest to pay. You then get a discount if you pay it all up front – and a rather heavy discount at that. If you frame the sale as the price you pay up front, but you pay more if you pay over time, then there is clearly an interest rate. It seems very misleading towards consumers for me.
Interestingly, this method is basically the more or less the same as Islamic loans in which interest is not charged but a higher price is charged than the ‘pay now price’ and the buyer pays either in installments or as a lump sum at some point in the future.
I don’t disapprove of high interest rates because it can mean that people have access to services that they would not otherwise have access to. But I do disapprove of consumers being misled with false claims of zero per cent interest, and my feeling is that this is what is happening here.
*I’ve not got time to do the exact calculation now but I’ll give it a ball-park figure of around 35% Annual Percentage Rate (APR)
