There seems to be a lot of noise and fuss around the repo rate going up. But what does this actually mean for your chunkuras? Let’s decode the jargon and unlock the repo rate.
The repo rate is one of the most important considerations when it comes to applying for a vehicle, bond or a loan. It affects not only the monthly repayments, but also how much interest will be paid over the entire period of a loan.
The Monetary Policy Committee (MPC) is in charge of making changes to the repo rate. They meet six times a year to decide if it should be increased or decreased. And yes, you guessed it, they also meet in the month of May.
So what’s the fuss?
The repo rate is the rate at which the South African Reserve Bank lends money to private banks. If the repo rate goes up, the bank’s prime lending rate – the rate it charges customers who need to borrow money – goes up. This will affect the amount of interest that someone who has taken a bank loan will have to pay. It will also increase the monthly loan repayment amount. Conversely, a drop in the repo rate, and subsequent drop in the prime lending rate, will reduce the monthly repayments of a customer.
Think of it like this: Sipho (Reserve Bank) borrows Andrew (Private bank) R1000 but charges 5% interest (Repo rate). Andrew then decides to lend you the same R1000, but at an additional interest rate (prime lending rate) to what Sipho is charging him because he wants to make a profit. Let’s say it’s 8% interest. If Sipho increases the interest rate that he charges to Andrew, Andrew will do the same to you. The higher the interest rate the more money you will have to pay back to Andrew.
The repo rate has a direct impact on the prime lending rate, which is the repo rate plus the amount which the bank adds to ensure they make a profit on their loans. The lower the repo rate, the lower the prime interest rate.
Continue your journey to becoming #MoneySmart
Follow us on social media