The Repo Rate and Prime Lending Rate can affect home loan and vehicle finance repayments – but what do these terms mean? We explain in more detail.
What is the Repo Rate?
When you borrow money from a commercial bank, that money isn’t waiting in a vault – instead, commercial banks, such as Standard Bank, FNB, Capitec, ABSA or Nedbank will instead borrow large sums of money from the South African Reserve Bank to offer loans to their own clients. This allows banks to lend out money that they don’t have, and earn interest (income) from loans that they can offer to customers.
Banks essentially offer a loan ‘on top of’ a loan, so there needs to be a rule that determines the interest rate banks themselves can borrow from the Reserve Bank.
The Repo Rate is the interest rate that banks pay to borrow money from the Reserve Bank. As the Repo Rate is either lowered or raised, it becomes more expensive for commercial banks to borrow money – and this is what determines how affordably banks can lend money to customers through various forms of loans.
Certain customers will be affected by changes to the Repo Rate, as this rate applies when banks borrow from the Reserve Bank itself. This is called the Prime Lending Rate, which directly affects anyone borrowing from a commercial bank.
What is the Prime Lending Rate?
The Prime Lending Rate is the rate of interest that commercial banks will charge their clients when issuing a loan, such as vehicle finance or a home loan (sometimes referred to as a bond). The Prime Lending Rate, which at the time of writing is 7%, is the ‘default’ interest rate that consumers are charged when borrowing money – and banks are free to adjust this number based on a number of factors when you apply for a loan.
For example, your credit score, credit history, income, bank of choice, and whether or not you choose to lodge a security with your loan can all affect what interest rate you can be charged by your bank. For this reason, such interest rates are called ‘linked to Prime’.
When you borrow from a commercial bank, your interest rate will be determined by the Prime Lending Rate either with additional, or less additional interest. For example, further interest added to the Prime Lending Rate might be referred to as 7% + 2%, making for 9%.
It’s important to note that as the Prime Lending Rate changes (as it can be either raised or lowered) your interest rate will change as well. If the Prime Lending Rate were dropped to 5%, your new interest rate (using the same example above) would now change to 5% + 2%, making for 7%.
When does the Prime Lending Rate affect my loan?
When you borrow from a major commercial institution such as a bank, the Prime Lending Rate is usually determined as the baseline interest rate you will be charged.
The Prime Lending Rate does not affect personal or short term loans, and instead usually applies to sums of money larger than R250 000. For this reason, it is common to be charged the Prime Lending Rate (plus or minus additional interest) when applying for a home loan or vehicle finance.
Changes in the Prime Lending Rate, in that regard, will affect your loan, your monthly repayment amount, and the total amount repayable on your loan. When you accept a loan from a commercial institution, it is important to evaluate the current Prime Lending Rate and what you could eventually be charged, should the rate itself change.
Does the Prime Lending Rate affect my Wonga loan?
No, as Wonga does not borrow from the Reserve Bank, and we don’t offer personal or short term loans that are linked to the Prime Lending Rate. This means that during the course of your loan repayment, your interest rate will not change – meaning that you have complete control over the total amount repayable on your loan, which is visible before you ‘apply’.
Wonga offers loans at just 5% interest for new customers, and 3% for existing customers.
How can I budget for changes in the Prime Lending Rate?
Unfortunately, changes in the Repo Rate and in the Prime Lending Rate are made in response to how the South African economy is performing. As such, both rates can change over time and may even change over the course of your loan repayment to your bank of choice. This can make budgeting for sudden interest rate changes hard, and can also impact your budget should your monthly repayment amount change as a result.
While it’s not possible to predict or plan ahead when considering how the Prime Lending Rate may change, there are a number of proactive steps you can take - and knowing how to save money before accepting a loan quotation could also help you save.
- Before accepting a loan quotation, ensure that you can verify whether the agreement is subject to the Prime Lending Rate.
- If your loan is subject to the Prime Lending Rate, negotiate your interest rate. While you will be unable to change the fact that your interest rate will be linked to Prime, you can negotiate the variable interest you may receive which is subject to your loan conditions. If possible, ensuring you have an interest rate with Prime minus (such as, 10% - 2%) can ensure that your repayments will always be less than the Prime Lending Rate.
- Before accepting a loan subject to the Prime Lending Rate, ensure that you have reviewed prior changes in the lending rate. For example, in 2008 the Prime Lending Rate was 15% - by recalculating your loan term to these values, you can get an idea of what your monthly repayment might be should the Prime Lending Rate change significantly.
- When you draw up your monthly budget, keep a small excess amount on standby in the event the Prime Lending Rate increases. This can help keep you prepared in the event of any changes.
- Lastly, pay attention to when the Reserve Bank issues statements on changes to the Repo Rate, as this will lead to changes in the Prime Lending Rate. You can see current values here.