28 Jun Personal Loan Interest Rates in South Africa
If you’re thinking about taking out a personal loan, being aware of loan rates and what they are influenced by is important. On average, South Africans can expect to pay anywhere from 18.25% on a loan to 28.25%.
This post is a crash course on interest rates: how they work, what influences them, and how you can secure the best terms for your personal loan.
What is interest?
Interest is the money you pay for the service of taking out credit. It can be expressed in Rands or as a percentage, usually as APR, which stands for annual percentage rate. This is how much you pay on interest in a year.
Simple and compound interest
There are two types of interest: simple and compound.
Simple interest is interest only charged on the principal (initial amount). Compound interest is the interest charged on the principal and previous interest. For example, if you borrow R100 with 5% interest per R10 monthly instalment, you can expect to pay R105 on month two and R105.25 on month three.
The formula for calculating simple interest is Interest = Interest Rate * Principal or Balance. The one for calculating compound interest is A = P (1 + r/n) * nt.
Where:
- A is the accrued amount (so principal + interest)
- P is the initial/ principal amount
- r is the annual nominal interest (interest before inflation) rate as a decimal (e.g. 0.5)
- n is the number of compounding periods per unit of time
- t is time in decimal years
Interest is usually expressed as APR and charged per year. Usually, lenders prefer to use compound interest to earn more money. It can act as a passive source of income, can provide a steady flow of income is debtors are reliable with payments, and is an efficient use of capital.
Why do we pay interest?
Interest is the compensation to creditors for them letting us borrow their money. It also compensates them for the risk of default (not paying them back) they take.
What influences interest rates?
Supply and demand of credit, inflation, the government and your risk factor.
Supply and demand
Increased demand for credit will raise interest rates, just like increased demand for a good or service would raise its price. Concurrently, a decrease in demand will drive down interest rates.
Inflation
Inflation is also a key factor in determining interest rates. The higher the inflation rate, the more interest you can expect to pay. That’s because lenders set higher interest rates to compensate for the decrease in buying power their money will hold.
Risk
Lenders also set your interest rate by assessing how high of a risk you are. The lower your credit score or the worse your financial history, the higher your interest’ll likely be.
Who determines interest rates in South Africa?
Lenders usually tack on more interest than the SARB (South African Reserve Bank) and the National Treasury decide on. They decide on monetary policy, which is the amount of money our economy should have in circulation and how we should keep inflation low.
The base interest rate is called a repo rate, determined by short-term policy. The Monetary Policy Committee meet 6 times a year to set the repo rate. The committee includes the Governor of the SARB, the three deputy governors and senior officials appointed by the Governor. Right now (late June 2024), the repo rate is 8.25%.
What you can do to secure lower interest rates on personal loans
Keep your credit score low and maintain a positive financial history. The most important determiners of a high credit score are:
- Low credit utilisation rate (the amount of credit you use compared to your limit)
- Long-standing credit history
- On-time payment
- Diverse lines of credit
In summary, personal loan interest rates range from 18.25% on a loan to 28.25%. Interest rates fluctuate because of changes in repo rate, supply and demand and inflation. Lenders decide on interest rates based on the prime (repo) interest rate and your risk profile.
If you would like low interest rates on a personal loan that you can use to pay off all your debt at once, contact Debt Refinance.