Tuesday, 11 December 2018

Manage the impact of interest rate hikes on your debt repayments

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When interest rates remain low for a while, it’s easy to assume that they will stay that way indefinitely. The recent interest rate hike by the South African Reserve Bank was a rude awakening, raising the prime lending rate by 25 basis points to 10.25 percent effective from 23 November 2018 - a reminder that even a small hike can affect your budget and lifestyle. 

 “An increase in the lending rate means that servicing your debt will become more expensive as it means higher monthly repayments on all forms of debt such as  bond repayments, credit cards, vehicle finance, personal loans and retail accounts,” explains Nkazi Sokhulu, CEO and co-founder of Yalu, a digital player in the credit life insurance space.

“Consumers are already stretched with higher fuel and transport costs, more expensive food, goods and services, and higher borrowing costs due to inflation.  The most important thing for consumers right now is to try and work down their debt as quickly as possible to save on borrowing costs.  Although the rate hike was not huge, it does impact every credit line you have, from bond and car repayments, credit cards, personal loans and so on. Further interest rate hikes are also not off the cards. The cumulative effects of higher interest rates across all your monthly debt repayments can be significant, and that extra money will need to come from cutting back on non-essential spending,” says Nkazi.

Cutting back can be as simple as packing lunches instead of eating out, or more drastic such as cancelling subscriptions and staying home for the holidays.  As far as possible, try and pay more than the minimum on your debt repayments to give you some breathing space.  Additionally, make sure that as much as possible of your monthly repayments are going towards servicing your actual debt, and not to overpriced credit life insurance on your loan.

An overlooked area of reigning in spending is to revisit the hidden costs associated with your loans.  Most people assume that these monthly repayments are fixed and that there’s little that can be done to trim costs, but an area where significant savings can be realised is on the cost of the credit life insurance which most banks require as security for your debt should you become unable to service your loan repayments due primarily to death, disability or retrenchment. 

“Most people don’t even know they have this cover or how much its actually costing them – people simply accept the credit life insurance that’s offered at the point of signing their loan agreement to avoid the ‘hassle factor’, never giving it a second thought again.  In fact, most consumers don’t know that they are not obligated to take this cover with the bank and that there are more affordable options with better benefits available to them. Even on an existing loan, you can switch your credit life insurance to a provider that offers lower rates and more benefits without any repercussions for your loan as long as there is no break in cover.”   

New credit life insurance regulations came into force in August 2017 which capped credit life insurance costs to R4.50 per R1000 borrowed, and it allows consumers to select their own preferred credit life provider rather than the bank offering, and to switch their existing cover should they find a product offering that better meets their needs. What’s particularly important to note is that the capping of fees for credit life insurance premiums only applies to new loans and not retrospectively; and so loan providers have no obligation to reduce the very expensive credit life premiums from policies issued before August 2017.  This means that you could easily be paying more than double the now capped rate for your credit life insurance if your loan predates August 2017.   

If you’re still wondering about switching to more affordable credit life cover, consider this:   

On a personal loan of R60 000 with a repayment period of three years:    

  • Total credit life paid at R3.50 per 1000 over three years: R210/pm x 36 = R7 560
  • Total credit life paid at pre-Aug 2017 rate of R8.50 per R1000 over three years: R510/pm x 36 = R18 360
  • Difference:  R10 800 over 36 months or R300 per month

“Take a good look at your current loan agreements and make sure you are paying the best possible rate for your credit life cover. An extra R300 month paid off on your loan is a big saving straight back into your pocket.  By switching your cover to more affordable rates and better benefits with the Yalu Credit Life Insurance Plan, the money saved can rather go towards paying off your existing loan and reducing the impact of compound interest on your pocket or redirected to paying for other essential household expenses” says Nkazi.

When times are tough and money is tight, be diligent about saving and taking active steps to curb unnecessary costs – the cumulative effect of all your cost-saving measures will see you riding through the interest rate hikes with your sanity, budget and lifestyle intact.

For more information go to www.yalu.co.za

Our name “Yalu” is short for the Zulu term isiyalu - the source of a river.  Yalu was born out of a passion to nourish and bring life to the world of credit life insurance. Our goal of delivering true value for money is evident in the transparency of our products, the simplicity of our process and the fairness of our pricing.  Simply put, we believe in doing right by our customers. By making credit life insurance easy to understand, ensuring that you pay what is fair and rewarding you when you settle your loan, we are changing the face of credit life insurance for your benefit.