What does a loan really cost?

A loan costs whatever you repay on top of the money that reaches your account. In South Africa that difference is made up of up to four things: interest, an initiation fee, a monthly service fee and, with some lenders, credit life insurance. Add them up and you have the cost of credit. Add the amount you borrowed and you have the total to repay, which is the figure worth comparing.

This guide takes each part in turn, shows a full example line by line and explains why a low monthly instalment can hide a higher price.

The four parts of the price

Interest

Interest is the charge for using the lender’s money. On most South African personal and short-term loans it is worked out on the part of the loan you still owe, often called the outstanding balance. Each repayment reduces that balance, so the interest in each instalment gets smaller.

Check two things in any quote. First, is the rate per month or per year? Second, is it charged on the reducing balance or on the full original amount? The difference is real. On R3 000 repaid over three months, 2% a month on the reducing balance comes to R120.79. Charged on the full R3 000 every month, the same 2% would come to R180.00.

Initiation fee

A once-off fee for setting up the agreement. Lenders handle it in different ways. Some take it off the payout, so you receive less than you borrowed. Some add it to the loan balance, which can mean paying interest on the fee. Others spread it across the repayments. Ask which method applies, because it changes both what you receive and what you pay.

Service fee

A monthly fee for running the account. Because it is charged every month, a longer loan pays it more times. On a small loan it can be a bigger part of the cost than the interest.

Credit life insurance

Credit life insurance pays some or all of what you owe if you die, become disabled or, with some policies, lose your job. Some lenders require it on longer loans. The Credit Life Insurance Regulations of 2017 limit what it may cost and let you use an existing policy that gives the required cover instead of the lender’s own. If a quote includes insurance, find out whether it is compulsory, what it costs each month and what it covers. RandLeaf doesn’t charge for credit life insurance on any loan.

VAT on fees

Interest on a loan doesn’t carry VAT. Fees charged by a VAT-registered lender usually do, at 15%. A clear quote says whether the fees shown already include VAT. RandLeaf’s published fees are final amounts that include any VAT that applies.

A worked example, line by line

Here is a R3 000 instalment loan repaid over three months, as a first loan. Worked example using RandLeaf’s published pricing, version RL-PRICE-2026-10. It is not a personal offer: a real quote depends on your assessment.

You receive

R3 000.00

Interest at 2% a month

R120.79

Initiation fee, once

R130.00

Service fee, R40.00 × 3

R120.00

Cost of credit

R370.79

Total to repay

R3 370.79

Look at the interest column. In month 1 the interest is R60.00, worked out on the full R3 000.00. By month 3 it is R20.40, because only R1 019.87 is still owed. The R130.00 initiation fee is split across the three repayments and never earns interest. The last repayment is R0.02 higher than the others: that is rounding to the cent, shown openly rather than hidden.

Why the monthly instalment can mislead

A smaller repayment feels cheaper. Often it isn’t. Here is the same R3 000 stretched over six months instead of three, using the same pricing.

The six-month loan lowers each repayment by about R526.35, but you repay R212.68 more in total. Two things drive that. Interest is charged for more months on money you still owe, and a service fee is charged for every extra month.

The practical rule: choose the shortest term whose repayment you can make comfortably every month. Not the shortest term possible. A repayment you can’t make leads to missed payments, which cost more than a slightly longer loan would have.

On small loans, fees weigh more

For a R1 500 short-term loan repaid after one month, the interest is R30.00, while the initiation and service fees together come to R110.00. Most of the cost is fees. That is why comparing small loans by interest rate alone misses the main part of the price. Compare the total to repay instead.

The legal limits are ceilings, not prices

Regulations under the National Credit Act cap interest and fees by type of credit. The figures most quoted come from Government Gazette 39379 (GN 1080 of 2015). For short-term credit it sets a maximum of 5% interest a month on a first loan and 3% a month on later loans in the same calendar year. It caps the initiation fee at R165 plus 10% of the amount above R1 000, with an overall limit of R1 050, and the monthly service fee at R60 plus VAT.

A cap is a maximum, not a recommended price. A lender charging the full cap is not breaking the law, and a lender charging less is not doing you a favour by law. The cap simply tells you nothing about whether a loan is good value. RandLeaf’s published rate and fees sit below these caps on every amount and term. Rules can be amended, so if a figure matters to a decision, ask the lender which regulation it applies.

How to check a quote yourself

1. Find the amount that will actually be paid into your account. If fees are taken off the payout, this is less than the loan amount.
2. Add up every repayment: the regular instalment times the number of months, plus any different final payment.
3. Subtract step 1 from step 2. That is your real cost of credit.
4. Compare your answer with the total in the quote. If the numbers don’t match, ask the lender to explain the difference in writing.
5. Ask for the full repayment schedule, month by month, before you sign.

You can do the same sums for RandLeaf loans in our loan calculator, and every cost is explained on costs and fees. If you are weighing two offers, this comparison method takes five minutes.