Dominique Bowen
To ease the financial blow dealt to consumers during the early stages of the pandemic, the South African Reserve Bank (SARB) slashed interest rates. It made a difference for those who had entered into contracts with variable interest rates – lower interest rates resulted in lower debt repayments for things like mortgage bonds and vehicle financing agreements.
Now, with many aspects of daily life returning to some semblance of reimagined normal, and rising inflation, the interest rate must follow suit. So, in November, and again in January and March this year, the SARB increased the repo rate (the bank lending rate) by 25 basis points (bp) each time – in line with the goal to restore it to a pre-pandemic level of 6.50% by the end of 2024.
Last week, the SARB’s Monetary Policy Committee decided to increase it further, by 50bp, to 4.75%. Neil Roets, chief executive of Debt Rescue. “After the release of the most recent Consumer Price Index (CPI) statistics of 5.9% in March, the possibility was strong that the interest rate would increase for the SARB to contain inflation within their range of 3 to 6%.”
What this means for your debt
You may recall discussion in your social circles or around the virtual office water cooler about how the lowered interest rates at the height of lockdown triggered a property buyer’s market, and how it was the opportune time to pay down debts with the interest rate having plummeted. With the interest rates going up again, the converse applies. “The increase means that consumers are likely to find themselves paying more for any form of credit they may have,” says Ester Ochse, product head of FNB Money Management. “Higher interest rates translate to costlier financing for borrowers.”
Roets adds that with this reality comes the need for consumers to approach new debt very cautiously. “When entering into credit agreements, the interest rate is one of the biggest factors to consider, as it is the one variable you most likely cannot control.” Practise caution with these smart borrowing behaviours:
Decide whether borrowing is necessary. A personal loan might seem to solve a multitude of problems for you right now, but have you explored all other options for the financing you need? Could the renovation wait? Is there cash flow waiting to be unlocked by a review and adjustment of your budget? “Ask yourself if the loan for a [desired] purchase to be made can be deferred and can rather be made through savings, meaning that a smaller loan will be required,” says Steven Barker, head of Everyday Banking and Cash Lending at Standard Bank.
See if you can actually afford it. Before you even look at bringing a new credit agreement into the mix, remember that your existing debt is subject to future interest rate hikes. So think about how your budget needs to accommodate this growing line item before you add another loan to the list. “Avoid entering into debt if your budget is already extended to the max, or if a further change will lead to that,” suggests Roets.
Shop around. Don’t rush into signing an agreement just because it sounds okay. “Research the market and explore the range of credit options available to you,” says Ochse. “This can help you learn the basics of borrowing and whether a loan is appropriate for the goods or service you would like to buy.” Doing your research also gives you the freedom to ask questions about different loan products and make fair comparisons based on your unique needs.
Don’t sign blindly. When you have a loan offer in front of you and you’re sitting at the bank, it’s easy to succumb to pressure to sign straight away. Instead, ask questions about any terms you aren’t clear about, and make sure you understand the full cost of credit of the agreement. “Don’t only focus on the monthly repayment of the loan; ensure you also understand the total cost of the loan,” says Barker.
Should you consolidate your debt?
Debt consolidation does not mean that you become debt-free, but rather that instead of paying multiple creditors, which is mostly overwhelming, you replace all the debts you have with one manageable debt that you can hopefully pay off, explains Ochse.
So, is it right for you? The answer to this question is largely determined by the interest of the debts compared with the interest of the loan. If you have smaller debts accruing interest of between 17 and 20% per year, for example, it could make sense to take out a loan at, say, 15% interest per year to settle those debts, leaving you with a singular amount at a lower interest rate to settle with one lender. Be careful, though, of turning short-term debt into long-term debt, because, even at a lower interest rate, you’ll be paying more in the long run.
PERSONAL FINANCE