Interest rate changes have some interesting effects on an economy. How does it work? And when does it affect you?
In South Africa there is an institution called the South African Reserve Bank (SARB). They exist to oversee all kinds of economic factors in South Africa. One of these factors is the interest rate in South Africa. The rate established by the SARB is called the Repo Rate.
The Repo Rate is vitally important. The Repo Rate is the rate at which banks will borrow money from the SARB. The Repo Rate change will have a direct effect on the change of the Prime Rate. The Prime Rate is the rate at which banks will be lending to people. So if it gets more expensive for banks to borrow it will become more expensive for people to borrow from banks. The changes in the Repo Rate will have a direct effect on the interest rate on loans.
When you apply for a loan you will see in the agreement that the interest rate is either fixed or unfixed. A fixed rate means that no matter what happens, the interest rate on your credit agreement will remain the same. On the other hand – an unfixed rate is subject to change according to the interest rate changes enforced by the South African Reserve Bank.
When will these changes have an effect on me?
If you are still to apply for a loan and the SARB changes the interest rate it will affect your decision. If the interest rate goes up loan costs will go up. If the interest rate goes down loan costs will go down. So you can budget for a certain fixed monthly instalment. But loan costs change when the interest rate changes. So the principal amount of debt you are able to afford will change as the interest rate changes. This is important to keep in mind. This will determine whether or not you will acquire the amount of credit you want to finance your need with.
When you have a loan that has an unfixed interest rate you will also be affected. When the interest rate goes up your monthly instalment will go up. When the interest rate goes down your monthly instalment will go down.
Don’t let the change in interest rates catch you napping. Know what repercussions it will have on your finances. With Fincheck you can make smart financial choices by having a look at our loan comparison page.