Credit cards have minimum monthly payments, but paying only the minimum on your credit card is not a good idea. When you use your credit card, you also pay back interest because you’re using money that doesn’t belong to you. 1,189 – 89 = R1,100, and this reduces your loan balance from R7,134 to R6,034 and so on until the whole amount is paid off. This gets subtracted from the monthly instalment. ![]() The loan balance then moves down from R40,488 to R39,805.īy the time your loan balance is at R7,134, you only have to pay R89 in interest. The R506 is again deducted from your monthly instalment, and the remainder, which is R683, goes towards paying off your principal. When it has been reduced to around R40,488, interest will now be R506 (as calculated in the previous section). This means you have reduced your loan balance from R50,000 to R49,436. The remainder, which is 1,189 – 625 = R564, goes towards paying off your loan. To explain this, we will use the same example given above.Įxample: For a R50,000 loan taken at 15% interest per annum over 60 months, the monthly repayment will be an estimated R1,189.įor your first instalment, the interest will be R625 (as calculated in the previous section). These instalments include the interest and the money that goes towards paying off the loan. When you pay back your loan, you do it in instalments. In addition, you can also use a simple interest calculator to get an idea of what to expect before applying for a loan. If you don’t want the hassle of calculating interest payments, most lenders do it for you. So, if you’re now left with only R7,134 to pay off, the interest will be: This adjustment is made until you finish paying off the loan. That means the interest you pay for that month is as follows:Īs you can see, the interest rate remains the same, but the interest payment is now lower. Let’s say, after five months, you are left with paying off R44,055 only. With each monthly payment, you are reducing the balance on the loan. The basic formula to calculate interest using the rate of interest looks something like this:Įxample: For a R50,000 loan taken at an annual interest rate of 15% over 60 months (5 years), interest for the FIRST month is calculated as follows: When you apply for a loan, lenders will tell you the interest rate as a percentage. You could potentially halve your interest rate by looking after your credit score. Hence, they are taking a smaller risk compared to lending money to another client with poor credit. This is because lenders are confident you’ll pay back the money. This is particularly important for large loans such as home loans.Ī higher credit score gives you better chances of getting a more favourable interest rate. If you reduce the outstanding amount more frequently, the interest rate you have to pay reduces also. This is because interest is calculated daily on the outstanding amount. By making weekly or fortnightly repayment, you will pay a little less interest by the end of the loan. Typically, you pay off your loan by making payments every week, 2 weeks, or once a month. Using a loan of R50 000 with an interest rate of 15% per year, it looks like this: In the same manner, borrowing money for longer will increase your interest costs. Secondly, a large loan may take longer to repay and therefore you end up paying considerably more interest. ![]() This is because of two reasons firstly 27.50% on R50,000 is more than 27.50% on R10,000. If you borrow R50,000, you might have to pay more interest than someone who has borrowed R10,000. That being said, several factors determine what the best interest rate is for your situation: The best interest rate for your loan is one that you can afford and which gives you maximum savings. What is the best interest rate for a loan?Īccording to the National Credit Act, the maximum interest rate in South Africa is currently 27.50% per annum. To sum it up, interest is the price you have to pay for using someone else’s money. On top of that, you also have to pay interest on the R50,000, so the lender can profit. This amount you have initially borrowed is called the principal amount. You have to pay back all the R50,000 since the bank is not acting as a good Samaritan. As an example, let’s say you borrow R50 000 from the local bank. One thing these types of loans have in common is interest. There are all kinds of loans personal loans, student loans, car loans, and home loans, to name just a few. ![]() This way, you can negotiate the best interest rate for yourself and avoid being taken advantage of. The best thing you can do is to arm yourself with the correct information. Most lenders are looking to make a profit through their various loan products. Therefore, it’s crucial to be familiar with interest rates if you want to save money on your loan. When applying for a loan in South Africa or anywhere else in the world, a little understanding of important financial terms goes a long way.
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