09 Aug Interest Rates in South Africa

South African interest rates can fluctuate wildly depending on the type of loan you take out, your credit score, and the prime lending rate. Interest rates are the amount of money you pay on top of a loan. They’re used to process loan applications and help lenders make a profit on the money they lend out.

There are two types of interest rates: simple and compound. Simple interest is interest charged on the principal (money you started with) amount. Meaning, it does not compound (build up over time). For example, if I took out an R100 loan with 10% interest each month over 10 months, I would pay R10 interest plus R10 in repayments on that loan each month, making it an R20 repayment.

Most loans use compound interest, interest on top of interest. It’s interest charged on the principal and previous interest. For example, if you borrow R100 with 5% interest per R10 monthly installment, you can expect to pay R105 on month two and R105.25 on month three.

Understanding interest rates in the context of the South African financial landscape is important to making wise decisions about loaning money and from whom. Thus, this guide explores interest’s importance, who decides interest rates, and how you can attain better interest rates when taking out finance.

Who Decides Interest Rates in South Africa?

Interest rates are decided by organisations called SARB (South African Reserve Bank) and the National Treasury. They decide on monetary policy, which is how much money our economy should have in circulation at any given moment and how inflation should be kept low.

Our base interest rate–the minimum interest allowed to be charged–is called the repo rate or prime interest rate. The committee, consisting of the Governor of the SARB, the three deputy governors, and senior officials appointed by the Governor, meets 6 times per year to set the interest rate. As of early July 2024, the repo rate is 8.25%.

Lenders tack additional interest onto the repo rate to make a profit, often adding another 10% or more. This is to make a profit on the money they lend out.

What Influences Interest Rates in South Africa?

The government, supply and demand, inflation, and how high-risk you are. 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 is another driving factor of interest rates. The higher the country’s inflation rate, the more interest you can expect to pay. This is because lenders set higher interest rates to compensate for the decrease in buying power their money would hold.

Moreover, your risk status determines how high interest on a given loan will be set. The most common risk determiner lenders use is your credit score. The higher your credit score, the lower the risk you are. That’s because credit score is calculated by taking repayment history (whether you’ve defaulted or made late payments), credit utilisation rate (the amount of credit you use compared to what you have available), and the diversity and length of your credit portfolio.

How to Get Great Lending Rates

Get better interest rates by building your credit score. You can do this by maintaining a low credit utilisation rate, paying on time, maintaining a diverse credit portfolio, having long-standing accounts, and not defaulting (not paying back loans).

Need a Loan offers lower interest rates on short-term loans than other organisations. If you would like to secure a low-interest loan with terms specific to your financial circumstances, contact Need a Loan today. We would love to help you finance your wants and needs.