If you’ve loaned money, whether it is large sum for the purposes of acquiring a home or vehicle or a small sum such as for personal loans and in-store cards – all of these are linked to the prime interest rate.
What is the prime interest rate? It is defined as the rate of interest at which the banks lend money to consumers and is benchmarked on the Repo rate, which is the rate that private banks borrow from the South African Reserve Bank.
From Prime to Debt
The starting point for any debt is the prime interest rate. This means that when you take out a loan, the rate of interest which you repay on the loan is based on the prime interest rate, plus or minus a margin. This margin to the prime interest rate depends on your risk profile, which is determined by your credit report – as well as whether there is security for the loan.
The increases are here
Unless the interest rate on the loan is fixed, if the prime interest rate changes, so too will your monthly instalments. Until recently, the prime interest rate was 8.5%. On 29 January 2014, the Repo rate was increased by half a percent, which further bumped up prime interest to 9%. Which means increasing interest for everyone who is currently lending money, making your loan more expensive.
To avoid the interest rate rollercoaster, financially savvy consumers must do the following:
Only incur debt for those absolutely necessary items.
- Live well within their means and don’t succumb to peer pressure to spend.
- Prepare a budget with a built-in buffer for unforeseen expenditure, to ensure that monthly installments on debt undertaken can be repaid.
- Use your monthly savings on unforeseen expenses which crop up every month and to pay off your debt quicker.
The cost of living is extremely high, and consumers are struggling financially. With the fuel hikes, e-tolls and increased interest rates, South Africans are experiencing more financial pressure, so don’t let yourself get caught by increasing interest rates and more debt.[tip title=”Moneysmart Tip”]Get your free credit report with Moneysmart and start making your debt history.[/tip]