Interest Rates 101

Written by Your Future Now

You see the headlines on the news reading Repo Rate Hikes or Interest Rate Hikes and think this doesn’t affect you or you just couldn’t care less about financial news. Secretly, you don’t know what these headlines actually mean. The South African Reserve Bank’s Monetary Policy Committee (MPC) announced a repo rate hike to 6.25% on the 19th of November 2015. This is the second repo rate hike for 2015.

If you felt intimidated by the above paragraph or if it was a complete blur to you, this Your Future Now article will attempt to shine some light on the recent hike in rates and what these hikes will mean when it comes to large and long-term purchase decisions.

Repo Rate: Rate  at which commercial banks borrow money from SARB – currently at 6.25%
Prime Rate: Rate at which consumers borrow money from commercial banks – currently at 9.75%

What is the repo rate?

The repo rate (or repurchase rate) is the interest rate charged by the South African Reserve Bank (SARB) when commercial banks borrow money from it. Commercial banks are the likes of First National Bank, Standard Bank, ABSA, Nedbank and others.

After the rate hike announced in November – the second increase in 2015 – the repo rate stands at 6.25%. Word on the street is that South African consumers can expect a further increase in January when the Monetary Policy Committee (MPC) has its first meeting of 2016.

What is prime rate?

The prime rate, also known as prime lending rate or simply the interest rate, is the interest banks charge you and me when they lend us money.

For example, when you finance a vehicle through a bank or a financial services company, the loan agreement will specify an interest rate of prime plus 3%. This means that your vehicle loan will cost you the current prime rate plus an extra 3%. The 3% is a personalised rate and differs from consumer to consumer. Having a good credit score will see you paying less (or even no) additional interest on top of the prime rate.

With the recent increase, the prime interest rate is now 9.75%.

How will it affect you?

An interest rate increase can be good news or bad news, depending on your debt and savings situation. If you have short-term debt (like a personal loan, clothing account or a credit card) or long-term debt (like a home or vehicle loan), your repayments will increase. For example, if you have an existing home loan of R500 000, taken over a 20-year period at a linked rate, your monthly repayments will increase by R404 per month. If you have a savings or investment account, you will earn more interest on it. This means that your money will grow a bit faster than before. However, if you have agreed a fixed interest rate with the bank, neither your loan repayments nor the interest you earn on savings will be affected by repo and prime rate increases.

How will it affect the economy?

The following factors can be influenced when the repo rate increases:

  • Business growth declines.
  • Consumer and business debt levels increase.
  • Consumer spending power decreases
  • The inflation rate stabilises and is contained

Getting out of debt should be your top priority right now – especially with another rate hike looming early in 2016. With the festive season coming up, consumers should save where they can and allocate those savings towards their debt.

Article Categories:
Consumer Protection · Credit and Debt

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