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Plan for possible interest rate hikes and pay off your debt as soon as possible

30 May 2012 National Debt Mediation Association

Although interest rates have been at historically low levels since 2009, there are signals in the economy that this might change in the near future and as a result consumers should start factoring in a possible interest rate increase when planning their f

Economists predict that the Monetary Policy Committee with the Governor of the South African Reserve Bank, Gill Marcus at the helm will announce an increase in interest rates either towards the end of this year or in early 2013. These predictions imply a possible increase in the current repurchase (“repo”) rate of 5,5%, the rate at which the central bank lends to commercial banks in the country. Such a decision would also lead to an increase in the prime interest rate of 9% - the base rate used for calculating interest rates at which banks lend to consumers.

“It’s especially important to consider what an interest rate increase of one or two percent would do to your debt repayments,” says CEO of the National Debt Mediation Association, Magauta Mphahlele. “Calculate the increase in rands and cents so you can adjust your budget to accommodate a possible increase in your monthly instalments.”

In terms of the National Credit Act the interest rate formula calculation is linked to the repo rate and as a result any changes to the repo rate will affect the rate that consumers pay for their secured and unsecured loans. This is especially the case for those who have opted for a variable interest rate. A variable interest rate means that your interest will go up when the repo rate increases and will go down if it is decreased. Depending on the circumstances consumers with fixed rates will not be impacted as their agreements protects them from repo rate increases. A fixed rate means that your interest will remain the same when the repo rate goes up and this ensures that you are able to maintain the same monthly repayments. The main advantage of a fixed rate in this sense is then that it creates certainty for budget purposes, but other possible costing downsides should also be considered. This option needs to be understood properly by consumers before they opt for it...

“Consumers should use the additional money they have when the rates reduce to pay off as much of their debt as possible. Those taking up new credit must factor in possible rate increases as part of their affordability and ensure that they would still be able to afford their repayments when the repo rate increases.” says Mphahlele.

Although the household debt to disposable income ratio in South Africa decreased from 78,2% in 2010 to 75,8% in 2011, it still remains high and consumers must still work hard to reduce their debt exposure. “An interest rate increase of just one or two percent can have a long term compounding effect on the total interest you pay over time,” explains Mphahlele. “It also has a significant impact on your monthly repayments.”

By way of example: if you have taken out an unsecured loan of R20000 for repayment over 36 months you would currently be paying a maximum rate of 32.1%. If the repo rate goes up by 1% this will increase to 34.3% and this increase means a consumer’s repayments for one relatively small loan could increase by more than R22 per month, which is a total amount in excess of R800 over the period. When such an increase not provided for is then applied to all the loans and credit facilities that the consumer obtained, some consumers’ budgets become unmanageable and they end up in an over-indebted situation. The average credit active consumer has a minimum of six credit agreements. .

“Do a proper budget to make sure that you have enough spare cash to pay the increased monthly payments,” says Mphahlele. “If you already have debt this may mean cutting back on other unnecessary expenditure but if you are taking out new credit create make sure your long term affordability factors in possible interest rate increases.”

Consumers who are experiencing payment difficulties must contact the NDMA for advice and assistance.

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