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

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