The economic consequences of the COVID-19 pandemic have financially constrained many consumers.
To stimulate much needed economic growth and help already cash-strapped consumers, the South African Reserve Bank (SARB) has reduced the repurchase (repo) rates over the last few months, making them the lowest they have been since 1998.
This decrease in interest rates has certain positive outcomes for consumers, namely consumers’ expenses towards debt are reduced and lowered such as vehicle finance, overdraft, mortgage bond and personal loan repayments if the rate of interest was variable.
However, the Credit Ombud cautions consumers against extending themselves with more debt due to the interest rate cuts. While it may be tempting to purchase on credit because of the reduced interest rates, consumers must remain alert to these purchases being a need or a want and ultimately, coming at a cost.
What are interest rates?
Interest rates are prices paid for funds borrowed over various periods of time, such as when purchasing a property and taking out a home loan. The supplier or lender of funds (commercial banks for example) earn an income based on a percentage of the loan amount, and the user or borrower (customer) pays interest for the right to use the accumulated funds.
What is the repurchase or repo rate?
The repurchase or repo rate is the interest rate at which the South African Reserve Bank (SARB) lends money to private banks. The SARB acts as a banker for private banks. A change in the repo rate will affect people who have home loans or who have borrowed money from the bank.
What is the prime lending rate?
The prime lending rate is basically a marked-up version of the repo rate that banks use as a starting point to calculate interest rates for specific clients based on the amount of money they are borrowing.
What is a variable interest rate?
A variable interest rate is linked to the prime lending rate. That means if prime goes up, your repayments go up, and if prime goes down, your repayments go down too.
What is a fixed rate?
A fixed rate is not linked to prime which means that the rate the bank quotes you is exactly what you will pay, regardless of what happens with the repo rate. A fixed rate is quoted as a specific percentage. Fixed rates are typically around 2% higher than variable rates.
The Credit Ombud offers the following tips:
- Budget – the key is to understand how you spend your money every month and then to identify how to change your spending – start with a savings plan.
- Ideally and if financially possible, continue making payment in terms of the original loan agreement if the interest rate was linked to a variable rate.
- Remember that it is sensible to pay a higher instalment per month, which will result in debts being paid up at a faster rate.
- If you decide to make lower payments adjusted to the reduced repo rates, then using the difference in the original instalment and the new reduced instalment, you could pay off other higher interest accruing debts.
- If you are fortunate not to have other debts, save the extra cash towards an emergency, retirement, holiday, next-big purchase or into a savings account.
- Once you pay off your credit cards with reduced interest rates savings, close these accounts so that you cannot be tempted to use them again.
- By maintaining healthy monthly payments, your credit history at the credit bureau will reflect that you are ‘credit-healthy’ consumer. Prospective credit providers will consider your credit history when credit is extended to you in the future and you will be able to negotiate favourable interest rates.
- Reward yourself in some way (add this to your monthly budget) for your discipline and sticking to your plan to achieve your new savings goals!
Interest rates are unpredictable – consumers must be aware that the SARB may increase the repo rate. The interest rate decrease means that if the interest rate on your debt is variable, your debt could now cost less to pay back. Take advantage of low interest rates! By paying back your debt and becoming a step closer to financial freedom.
The National Credit Act specifies the maximum prescribed interest rates that consumers can be charged when taking out credit, and since the repo rate has decreased, below are the maximum interest rates that credit providers can charge. Please also note that the maximums are dependent on the repo rate at a particular time, therefore, when the repo rate changes, the below maximums will also change.