Interest rate is the amount banks and other service providers charge for lending you money. It's calculated in percentage on your principal loan.
When you want to apply for a loan, it's always best to understand how interest rates work and calculated.
And the only way to know or estimate your next loan interest rate is by obtaining your credit report.
Let's dive right in.
How Interest Rates Are Calculated
When you borrow money, banks will check the application against your credit history and determine the interest rate to be charged.
They'll calculate a higher interest when they think you're high-risk and there may be issues with repaying the debt.
And when you don't have a credit history, you'll also get charged higher interest on the credit. This will also assist you in building a good credit score in the process.
Here's a simple formula used to calculate interest:
Interest rate: principal × interest rate × time
Use our loan calculator to estimate your total loan interest.
Who Regulates Interest Rates In SA
The South African Reserve Bank (SARB) manages and controls how interest rates are charged in South Africa.
Banks and other lenders must register with the National Credit Regulator (NCR) in order to operate the financial services business in the country.
Whenever you borrow money from the bank, they'll adhere and comply with the regulations to practice responsible lending.
Remember, banks are also in the business of borrowing money from your savings account. However, they set the terms and interest rate which they'll pay for using your money.
What's The Average Interest Rate?
The average interest rate for unsecured personal loans in South Africa ranges between 10.5 to 25.5 percent.
When you have bad credit, you could qualify for loans at about a 36% interest rate.
How much interest you'll qualify for will depend on the lender policies, your credit score, and affordability assessments.
Types of Interest Rates
Fixed Interest Rate
The most popular type of personal loans offered in South Africa. You'll pay fixed installments for the full term of the loan, unchanged.
It's the option for many borrowers because no matter how the economy behaves, it'll never affect your loan repayments.
Variable Interest Rate
You could also opt for a variable or fixed interest rate for your next credit.
It has both pros and cons, in the sense that you'll get the lowest rate which could eventually be adjusted, depending on the economic status of the country.