You’ve probably come across a host of factors that determine your loan repayments. Your credit history, loan amount, collateral, and loan T’s & C's all form part of the internal factors that influence the overall cost of your loan repayment.
Let’s take a look at some external factors that also play a vital role in influencing your Loan Repayments:
State of the Economy as a whole.
This is a factor that you don’t have much influence over versus what you do on your internal factors such as you credit score or personal income. The global economy is one of the biggest external factors that will, at some time, affect businesses and thus household spending which includes things like loan repayments. Market fluctuations based on politics, terrorism, wars, and currency devaluation eventually ripple down to the most commercial businesses.
So what drives the economy? Well, for the most part, it’s something we do very well, consumption. This is the driving force behind the economy. So, when the economy is rolling along, making the world go round, consumers are doing their part in driving it forward. A good economy needs to make things possible for you to make your life livable in the present and give you good prospects for the future – but, not everyone is positioned to benefit from a growing economy, for some who are in a lower income bracket or lack financial education, a rising economy won’t lift their circumstances as a result of increasing costs of products. This in turn increases the amounts people would need to loan to cover unexpected costs and therefore affects loan repayments as well.
Another macroeconomic (external) factor influencing the cost of borrowing money (interest), is inflation. In general, this is the increase in prices of goods & services, and thus the fall in the purchasing power of your money. It is measured as an annual percentage increase, and as it rises, every Rand you own, is capable of purchasing a smaller percentage of a good or service. Almost everyone cringes at the thought of inflation and views it as the enemy, this isn’t necessarily needed. Inflation affects us in different ways, it depends if we are anticipating it or unaware of it. Thus, if the inflation rate matches what we are expecting (anticipated inflation), then businesses can compensate and costs don’t rise as much. Banks can then vary their interest rates to compensate for rising costs. The main thing to note regarding inflation, is whether it is rising at a quicker pace than your wages. If so, this will increase your costs associated with loan repayments.
Chances are that when you hear the latest news regarding the inflation rate, the interest rates follow in the same breath. Interest rates directly affect the credit market because higher interest rates make borrowing more costly. South African banks lend their money from the SA Reserve Bank at a rate known as the Repo rate, and is used by the Reserve Bank to control the inflation rate, this in turn determines the interest rates we pay for borrowing money. In the event of inflation, the Reserve Bank increases the Repo Rate and this acts as a disincentive for banks to borrow from the Reserve Bank. This ultimately reduces the money supply in the economy and thus helps to arrest inflation.
As you can see, these external factors are tightly knit together, as one is a ripple effect of the other. It is wise to not only be aware of the internal factors that determine your loan repayments but also to educate yourself on the future predictions of living costs. If you’d like to keep a close eye on these factors, head on over to the SA Reserve Bank website.