As you start to consider applying for a credit card, taking out a loan or apply for a car or home-loan; you will be introduced to the concept of interest rates. Even if you are not planning to acquire any debt; and want to focus on building up your financial wealth; it is just as important that you understand how interest rates work in South Africa; so that you can become more financially-savvy; knowing what to look out for and how the interest rate may impact you positively, or negatively.
It is in your best interest to become more aware and educated of the facts and terminology surrounding interest rates. We cover some important interest rate jargon that every individual should be informed about.
The repo rate is the standard interest rate at which the Reserve Bank loans money to different banks. The effect falls down as these banks, in turn, modify the interest rates they charge for loaning money ‒ additionally the interest they pay out on savings and money market accounts.
One of the essential effects on interest rates is inflation. Interest rates and inflation trends move hand-in-hand; when interest rates decrease, it is a good indication that inflation is tame and under control; however, the opposite is also true.
While inflation does have an impact on the interest rate, it is not the main factor that is considered by the central bank when reviewing the lending rates. The bank additionally evaluates the condition of the global and local economy, as well as the nation’s overall credit rating. The direction of the central bank establishes the pace for lenders across the country. In any case, there are other components that they consider too. Low-interest rates are broadly considered as a boost for the economy. A solid and stable national economy presents the best opportunity to help an interest rate hike. Weak economic growth commonly is met with hesitation to raise interest rates.
The credit rating for the Government is another compelling factor. Any decrease in South Africa’s credit rating will bring about higher interest rates to moderate against the risk of default.
The extent of the loan term (i.e. the duration of the loan repayment) is another key factor that influences the interest rate offered, whereas a short-term loan typically has a much lower interest rate than a more long-term loan repayment period. This is on the grounds that the lender sees an extended lending term as a bigger risk to the bank.
Probably the most significant factor that contributes towards the interest rate that you will be offered, is your personal credit history. Lenders use a higher interest rate to alleviate the risk that you default on the loan. The better your credit score; the lower the risk and as a result; the lower the interest rate that you are likely to pay on a loan.
A cut in the interest rate is not always good news; especially if you are heavily reliant on your savings to survive. Unless you have invested your money in to a savings account with a fixed interest rate; a cut in interest rate could mean that you are earning less interest on your savings; while your debts may benefit from this reduction in interest. When you open your savings account, you are usually offered the option for a slightly lower variable interest rate, or a higher fixed term interest rate. You should consider which will be more beneficial to you in the long-term.
If you find yourself in a situation where you are paying a higher than normal interest rate; you may consider the option of refinancing the loan to take advantage of a more favourable interest rate. Restructuring your debt with a debt consolidation loan may also offer you the benefit of a reduced interest rate.
Interest rates affect us daily, from the goods and services we buy and sell, to the repayment plans we loathe. There is nothing mystical about how interest works. As a rule, the best time to apply for a new loan or refinance is when interest rates are low; and the best time to save is when they are high. Balancing your financial portfolio (debts and investments) is key to maintaining a healthy financial status.Go back