Variable rate personal loans in South Africa
When you take out a personal loan, you can choose either a fixed interest rate or a variable interest rate. Understanding how interest rates work helps you to choose a personalised loan that is suited to your situation. Remember, when it comes to loans, what works for someone might not work for you. While others might choose a fixed rate for their personal loan, a variable rate loan might be a better option for you. We explain how variable interest rate works so you can choose the best personal loan for yourself.
Introduction to personal loan interest rates
You can’t borrow money from a South African lender for free. These financial institutions make a profit when they charge fixed and variable interest. How much you have to pay back depends on the interest rate. The higher, the rate, the more you have to pay back. However, a low rate is much better since you can save money by paying less each month. Overall, the lower the interest rate, the cheaper the loan becomes.
How does a variable interest rate work?
As the name suggests, variable rates vary from time to time, that is to say, they change. This is compared to fixed rates which remain the same as long as you’re paying back your loan. Remember, the monthly instalments for your loan also include the interest charged by the lender.
Therefore, if your personal loan has a variable rate, it means the amount you pay back each month will be affected every time the interest rate changes. When the rate goes up, the monthly instalments increase which means the total cost of your loan will be higher. On the other hand, if the rate goes down, the monthly instalments decrease, which means the total cost of your loan becomes lower.
Why does the interest rate change?
A variable rate is also called a linked rate because it is linked to the activities of the South African Reserve Bank (SARB). In short, here’s how the process works:
- South African banks borrow money from the Reserve Bank, and they also pay interest. The interest rate charged by the Reserve Bank to banks is called the repo rate, base interest rate, or repurchase rate.
- To make a profit, the banks have to charge you an interest that is higher than the repo rate. This interest rate that banks charge their customers is called the prime lending rate.
- If the repo rate which is the base interest rate goes up, this results in rates rising. If the repo rate goes down, the prime rate also goes down.
How often does a variable interest rate change?
Since variable rates are linked to the market rate, it means your interest rate will be affected every time the repo rate changes. The Reserve Bank of South Africa usually changes the repo rate to reflect the current economic activities of the country.
Therefore, how often the variable rate changes depends on how stable the South African economy is. If the economy is stable interest rates will also remain stable, usually at a lower percentage. However, things like inflation and oversupply of money in the economy can cause the Reserve Bank to adjust the repo rate, which affects your loan payments if you have a variable rate loan.
Why should you choose a variable rate personal loan?
Besides the risk involved, variable rate loans can be perfect for you in the following cases:
- When you borrow money for a short period. That means you’re planning to pay back the loan quickly before the interest rate goes up.
- If you’re expecting the rate to go down while making repayments for your loan, you can choose a variable rate loan.
- If you’re looking for a starting interest rate that is lower and willing to handle the risk of an increased interest rate.
You can save even more with a variable interest rate
With a variable rate, you can get a lower rate since the bank can still make a profit from you when rates go up. However, the exact rate you get is also determined by your credit score. If your credit score is excellent, there is even less risk for the lender since they know you’re good at paying back your debts. Therefore, combining variable interest rate personal loans with a good credit score can help you save more. Another way to get a lower interest rate on your variable rate loan is to choose a secured personal loan.
Advantages of variable interest rates
- Lower starting interest rates – That means a lower monthly payment which makes the personal loan more affordable.
- You save money when the rate goes down – In this case, your monthly payment and therefore, the total cost of the loan is further reduced.
- They’re flexible – If the interest rates get too high, you have an option to switch to a fixed rate personal loan through debt consolidation.
Disadvantages of variable interest rates
- No guarantee the interest will go down – If the rate increases, you have to pay more each month, and this makes your monthly payment less affordable. In addition, the total cost of your loan also increases as you pay more interest over the life of the loan.
- It’s harder to budget for future payments – You might have to adjust your budget several times, especially if you’re keeping the loan for a long time.
How to choose the best South African lender for your variable rate personal loan
There’s more to choosing a cheap loan than the interest rate. Also, consider the following before making a personal loan application with any lender:
- Fees and charges: Even if the interest rate is low, the total cost of the loan can still be high if the lender has high fees and charges. Common charges include a monthly service fee and an initiation fee.
- APR (Annual Percentage Rate): This is also called a comparison rate because it includes interest plus other costs of borrowing money. It helps you compare loans so you can choose a loan that has a lower total cost.
- Loan terms and conditions: Look for a lender that offers flexible repayment terms. For example, it’s beneficial to have a loan that allows you to make an early repayment without being charged extra fees.
Tips for choosing the best variable rate personal loan
- Take out a loan you can afford – You can use our loan calculator to find the right loan amount that offers affordable monthly payments.
- Check for any hidden fees – Make sure you know of all the fees involved before applying for the loan.
- Balance your monthly payments with your repayment period – It’s important to remember that while a longer repayment period gives you a lower and more affordable monthly repayment, you’ll also have to pay more in interest. The best thing is to choose a loan that has affordable payments but which you can pay off as quickly as possible.
Applying for a variable interest rate personal loan
We have showcased popular South African lenders in our comparison tables to make the process of choosing a loan easier for you. Once you have made your choice, simply click the correct “Go to Site” button which takes you to the right website where you can start your online application process. To qualify for the loan, you will have to meet the following general requirements:
- Minimum of 18 years;
- South African ID;
- Proof of income; and
- Proof of residence.
Variable vs fixed rate
You can also choose a fixed interest rate for your loan. How do you feel about taking a personal loan with an interest rate that never changes? Although a fixed-rate loan usually comes with higher interest rates, they offer peace of mind and stability since you pay the same amount every month.
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