Repo rate hike: don’t take out a loan to fund your fes­tive sea­son spend­ing

Weekend Argus (Saturday Edition) - - GOODPOSTER -

You should avoid tak­ing out un­se­cured loans to fund con­sump­tion spend­ing over the fes­tive sea­son, be­cause the in­crease in the re­pur­chase (repo) rate will ex­ac­er­bate the neg­a­tive im­pact on your fi­nances, Rayanne Ja­cob­son, the chief ex­ec­u­tive of Izwe Loans, says.

The South African Re­serve Bank this week in­creased the repo rate (the rate at which the cen­tral bank lends money to banks) by 0.25 per­cent­age points to 6.25 per­cent. The cu­mu­la­tive in­crease since the bank started to raise the repo rate in Jan­uary 2014 is 1.25 per­cent­age points.

The prime lend­ing rate, which is the in­ter­est rate banks charge their clients, in­creased to 9.75 per­cent. How­ever, the rate at which many South Africans bor­row money is sig­nif­i­cantly higher, par­tic­u­larly if they have an un­se­cured loan.

The rate in­crease will not af­fect ex­ist­ing fixe­drate un­se­cured loans, be­cause only loans taken out af­ter the in­ter­est rate hike will be priced higher.

Ja­cob­son says the in­ter­est rate for an un­se­cured loan is cal­cu­lated at a mul­ti­ple of 2.2 times the repo rate with an added mar­gin.

How­ever, float­ing-rate debt, which ap­plies to home loans, ve­hi­cle fi­nance, credit cards and over­drafts, are linked to the prime rate.

“Con­sumers may not feel it im­me­di­ately, but the com­bined ef­fect of fes­tive-sea­son spend­ing and the float­ing rate com­ing up may hit them hard in the new year,” Ja­cob­son says.

The rate hike means that the re­pay­ments on a home loan of R1 mil­lion over 20 years will in­crease by R166.22 a month to R9 816.43 from R9 650.22, as­sum­ing that an in­ter­est rate of 10 per­cent in­creases to 10.25 per­cent. The re­pay­ments on a R250 000 car over five years will in­crease by R30.80 a month to R5 342.57 from R5 311.76.

But tak­ing into ac­count the rate in­creases since Jan­uary 2014 us­ing the same base­line (the in­ter­est rate in­creas­ing from 10 per­cent to 11.25 per­cent), con­sumers are now pay­ing R842.34 more a month on their home loan re­pay­ments and R155.07 more on their cars than they were in Jan­uary 2014.

Ja­cob­son says you should curb con­sump­tion spend­ing and pay down your most ex­pen­sive debt first. You should also con­trib­ute more to your monthly re­pay­ments, which will re­duce the term of the loan and save you in­ter­est. – Staff Re­porter

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.