Not all debts are created equal in South Africa. It depends on the type of loan one is taking and the choice of interest rate: fixed or variable/flexible. Before incurring more debt, pay attention to payback terms and interest rates, as it can make all the difference in your budget and debt repayment plan.
Most types of loans in South Africa provide both fixed interest rates and flexible rates linked to the country’s repo rate. This rate is determined by the South African Reserve Bank (SARB) and is currently still at a record low of 3.5% to stimulate the economy impacted by the ongoing pandemic threat.
Debt and variable interest rates
With a flexible interest rate, you can expect your monthly repayments to fluctuate from time to time. Any sharp increase in the base rate will lead to higher accrued interest and more debt repayment over time, which may prove problematic for some borrowers, particularly when faced with tighter budgets.
However, any substantial decrease in the interest rate, as with the decreed low repo rate following the financial downturn, will lower the monthly debt instalments. To keep the lower monthly repayments, borrowers may consider fixing their current loans, such as mortgage loans or vehicle finance, by switching from a variable to a fixed interest rate.
Depending on the total duration of your loan and the moment of changing interest rates, this move may prove either advantageous or detrimental to your debt repayment schedule.
According to economist Dawie Roodt, fixing interest rates is usually done for a limited period of up to three years, where the fixed rate remains unchanged for the loan duration.
However, the new fixed rate is typically 1,5% to 3% higher than the initial flexible rate you are paying, which can prove counterproductive in certain circumstances. Read more here: https://businesstech.co.za/news/finance/406401/the-big-rates-quandary-south-africans-now-face-fix-or-dont-fix-dawie-roodt/
Generally, it’s wise to move from a variable rate to a fixed interest loan when:
- there is a significant expected increase in the variable interest rate, which leads to costlier monthly instalments. Choosing the fixed rate option at the opportune time may decrease these repayments.
- your budget is tighter than it used to be, and you may benefit from a short-term fixed interest rate change, even if this is slightly higher than what you are paying now.
Fixed-rate interest loans
Fixing the interest rate on loans protects the borrower from fluctuating interest during the loan’s lifetime. Therefore, fixed interest rates ensure that monthly repayments stay the same while paying off the loan.
Loans provided at fixed rate interest range from low-interest home loans and vehicle finance to high-interest credit. A common type of unsecured debt suited for quick short-term expenses, personal loans typically have a fixed rate for the entire loan duration between one to five years, usually lower than credit card interest.
Since added interest is already higher on unsecured loans and credit card debt, it may be a good idea to make these monthly repayments more predictable at a fixed interest rate, the lower, the better.
Fixed-rate loans are a better choice than flexible loans if you work within a low or constrained budget, prefer a predictable repayment amount every month, or cannot afford any increases in interest or debt repayments.
Debt consolidation interest rates
Fixed repayments make it a safer, more predictable option for borrowers, ideal if you’re already juggling multiple unsecured debts or run into deep debt trouble. When you take a loan with fixed interest, you know exactly how much you repay monthly and how long you have until you pay off each loan.
For this reason, interest rates for debt consolidation, which combines multiple debts into a single one, are negotiated at a fixed rate throughout the debt repayment schedule. A good debt consolidation interest rate is significantly lower than the interest rates taken on the initial loan, which is vital to decrease monthly repayments and avoid defaulting.
Under debt counselling, it becomes easier to manage only one monthly instalment and its accrued interest instead of varying payments and interest levels. If you’re over-indebted and on a tight budget, you can also opt to spread out the loan, making even smaller payments over a longer time, although it will cost you more to finish it off.
A debt counsellor will review your accumulated debt and current interest to determine the best avenues and repayment plans for debt consolidation.
Need help with paying off debt? Consult an ezDebt counsellor today. Our professional advisers help you stay on track with debt repayments through affordable debt counselling and debt consolidation management. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.