Interest rates and how they affect your car payments

By Stuart Johnston

Interest rates fluctuate depending on a country’s economy. In this country, the South African Reserve Bank is in charge of setting interest rates. The SARB  keeps the economy stable by raising or lowering the interest rates. This has the effect of slowing down spending, or stimulating the economy by making it cheaper to borrow money from the commercial banks.

The Repo Rate and Prime Rate

To control this, the SARB uses an economic tool called the Repo Rate. This rate is the interest rate that commercial banks pay to borrow money from the Reserve Bank.

The Repo Rate, now at around 6,75 per cent,  drives the Prime Interest Rate, which is currently at 10,25 per cent. This Prime rate is the figure that all banks use as a starting point to negotiate interest rates for specific clients.

What does the Prime Interest Rate mean, when negotiating car finance?

A blue chip (financially solid) client may be able to negotiate a repayment rate that is at the current prime rate, or  slightly lower.

A riskier client would normally only be able to negotiate a loan at a few percentage points above the Prime Interest Rate. The thinking here is that for a less financially stable client, the risk of defaulting on the loan repayments is greater, so a greater profit margin is needed to justify granting the loan.

What about fixed interest rate loans?

It is possible to negotiate a loan with a fixed interest rate, so that your repayments remain stable over the whole repayment period. However, the thinking today is that it is better to take a lone that is linked to the prime interest rate.

So what happens if the Prime Interest Rate rises?

On a loan that is linked to the fluctuating Prime Interest Rate, if the SARB declares an increase in the Repo Rate, the Prime Rate will rise accordingly, and that increase will be passed on to you, in the form of an increase in your monthly finance repayments.

For instance, if you have been granted finance at a rate of Prime Plus 1,75 per cent, this would equate to you paying  interest of 12 per cent each month on your original loan.

If your borrowed amount was R200 000, on an instalment  plan set over 72 months (the maximum allowable period) , then your monthly repayment would be R3 910.04

If the Prime Rate rose from the current 10,25 per cent to 11,25 per cent,  your total interest rate (at Prime plus 1,75 per cent) on the loan would rise to 13 per cent.

Your monthly car repayments would then be R4 014, 82.

*These figures were obtained using WesBank’s Repayment Calculator, available online, which is a quick easy-to-understand tool to calculate your monthly car repayments. Bear in mind that these repayment figures quoted here do not include a deposit, or a residual (balloon) payment payable at the end of the instalment period.