What happens to your finances when the interest rate drops?

Interest rate cuts are a balancing measure against inflation. The South African Reserve Bank (SARB) looks at the inflation trend and economic landscape, and makes quarterly decisions on the repo rate, which is the interest rate at which it lends to banks.

These decisions affect your pocket, and often profoundly, in the following ways.

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Interest rate cuts are a balancing measure against inflation. The South African Reserve Bank (SARB) looks at the inflation trend and economic landscape, and makes quarterly decisions on the repo rate, which is the interest rate at which it lends to banks.

These decisions affect your pocket, and often profoundly, in the following ways.

1. Credit Cards

Depending on whether your credit card has a fixed- or variable interest rate, a rate cut means you’ll pay less. For consumers who opt for a fixed-rate option, there will be no change. But those with a variable interest rate will benefit from lower interest rate charges.

2. Savings and investments

With interest rate cuts, consumers earn less on their savings. Banks will pay less interest on short- and long-term savings accounts, and notice accounts. The same will apply to unit trusts.

Although this may signal concern for savers, it will not reflect immediately. Rates tend to move fairly gradually.

3. Mortgage

In a similar manner to your credit card, the effect of an interest rate cut will be dependent on your home financing option.

For home loans with fixed interest rates, there will be little to no impact on your repayments, whereas with a variable interest rate, you will be paying less.

This is also a win for potential- or new homeowners as it changes the short-term lending rate.

4. Car Loan

Car loans tend to attract higher interest rates than home loans. Here too, an interest rate cut can ease the financial pressure as your repayment amounts will become lower.

Since new cars are often financed by car manufacturers, an Absa consultant notes, this rate cut will decrease their costs as well.

5. Personal Loan

This type of loan is typically expensive because it constitutes an unsecured risk, meaning there is no asset to sell if the borrower defaults. But with a rate cut, even these loans become slightly more affordable.

An Absa consultant notes, “What’s important to understand is that this won’t make a personal loan significantly cheaper. They’re still more expensive than secured loans, such as vehicle finance and home loans. This is why you need to ensure you can realistically afford the repayments before taking a personal loan out.”

While interest rate cuts may mean paying less towards repayments, it may not completely alleviate financial strain. If you find that you’re unable to make ends meet and afford your debt, debt counselling may be an option for you.