In South Africa, the interest rate is used for two banking services, borrowing and saving money.
So you’ll earn an interest rate on your savings account and be charged interest when borrowing money – makes sense?
In short: the interest rate is money accumulated as commission for using someone else’s money (customer or bank and vise versa).
Let me show you how it is calculated.
How Interest Rate is Calculated
The interest is calculated as a percentage of the principal loan amount borrowed.
When borrowing money from the banks, you’ll need to repay the full loan amount plus the interest charged for the privilege of using their money.
And terms of the interest charged whether on your savings account or loan are determined by the lender or bank.
So for your savings account, the interest rate average between 7% and 12% annually.
That’s basically how it works and is calculated.
Example of Interest Rate Calculation
Use the following repayment calculator to see how interest is calculated for personal loans.
If you’re charged 12.9% on a R20,000.00 loan for 2 years, the total interest will be calculated based on the term as per the example below:
While the above example doesn’t show the admin fees banks and other lenders usually charge, you might want to consider them while calculating.
Types of Interest Rates
There are two types of interest rates lenders charge on your personal loan, i.e. fixed and variable.
The lender charges you interest for the whole term of your personal loan. It’ll never change regardless of economic shifts in the country.
The best part?
You’ll know exactly how much you need to pay at the end of the month and can budget wisely for it.
A type of interest that is adjustable over time, based on the prime lending rate index that changes periodically.
It has one main advantage that when the interest declines, the borrower will obviously pay less. Whereas the opposite can happen that you’ll have to pay a higher interest rate.
But the variable interest is generally lower than the fixed interest rates.