In the wake of South Africa lowering its interest rates by 0,25 percentage points – from 3,75% to an annual rate of 3,5% – consumers are warned against overburdening themselves with more debt.
The latest set of interest rate cuts effected by the South African Reserve Bank (SARB) has seen the repo rates reach their lowest point in over 20 years.
While cash-strapped consumers have welcomed these cuts, Kabelo Teme of the Office of the Credit Ombud has urged consumers to take advantage of low interest rates by paying off debt.
“While it may be tempting to purchase on credit because of reduced interest rates, consumers must determine whether a purchase is a need or a want. Consumers must remember that interest rates are unpredictable, and that the SARB can increase the repo rate in the future.
“The decrease in interest rates has, however, had certain positive outcomes for consumers, many of whom are grappling with the economic consequences of Covid-19. These include lowered vehicle, credit, overdraft, homebond and personal loan repayments,” said Teme.
The National Credit Regulator (NCR) has reiterated that consumers should take advantage of low interest rates by paying off debt.
In the latest issue of Money Smart News, a monthly newsletter aimed at providing information to help South Africans become better educated about finances, the credit ombud gives the following tips:
- Budget – the key is to understand how you spend your money every month and identify how to change your spending. Start with a savings plan.
- If financially possible, continue making payment in terms of the original loan agreement if the interest rate was linked to a variable rate.
- Pay a higher instalment per month, which will result in debts being paid up at a faster rate.
- If you decide to make lower payments adjusted to the reduced repo rates, you could pay off other higher interest accruing debts using the difference in the original instalment and the new reduced instalment.
- If you do not have other debt, save the extra cash towards an emergency, retirement, holiday or next big purchase.
- Once you pay off your credit cards, close the accounts so that you cannot be tempted to use them again.
- By maintaining healthy monthly payments, you will be able to negotiate favourable interest rates with prospective credit providers.
- Reward yourself in some way for sticking to your plan to achieve your savings goals.
Visit ncr.org.za for more information.