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How Do Interest Rates Work? A Quick Guide

As of March 2018, the central bank of South Africa has lowered their interest rate to 6.5%, reflecting a lessening of the rate of inflation.

However, with many South Africans lacking a savings account or an adequate savings account, private loans offer competitive rates in case of emergency.

When comparing these private loans one of the most important aspects to keep in mind is interest rates. A common question is how do interest rates work? Before getting a loan, check out our quick guide!

A Quick Guide to Answer the Question “How Do Interest Rates Work”

Getting a personal loan can be a lifesaver for a family in need. However, it is easy to get the wrong loan and be stuck with an outrageous interest rate. Even a lower interest can be disastrous if you do not understand how they work!

Our guide is going to break down exactly how interest rates work so you can make the best decision for your family.

What Is an Interest Rate?

Whenever you receive a loan you end up paying back more than the face value, or capital, of the loan. Interest rates refer to the percent of that loan amount that will be charged over a certain period of time.

Interest is charged over time, and offers an incentive for borrowers to pay off their loans more quickly.

How Does an Interest Rate Change Person to Person?

It is important to receive quotes and compare private loans before signing any contract because a loan is offered based upon your personal situation and the lender.

You and your best friend could both go to a lender and request the same amount of money, but receive different quotes and conditions. Often this is because you and your friend have different credit and lending histories, and different credit scores.

A credit score that is 720 and above will make your application competitive. If your credit score is not quite as good and falls between 680 and 720 then you will most likely be offered the amount you request, but your interest rate will go up. This is because your credit score indicates you are a risk for them to lend money to. A higher interest rate makes it more likely for the lender to make money on your loan.

If you are under debt review or your credit score is below 619 you will most likely need to bring up your score in order to receive a loan.

How Do I Avoid Paying More Than I Have To?

The fact of the matter is that any loan will end up costing more than the capital, or the amount requested. Interest rates reflect the reality that you are borrowing money for longer than a couple of days.

This doesn’t mean you have to pay 3 or 4 times the amount of your capital. Here are some ways to avoid getting the raw end of the deal:

  1. Pay back your loans on time!
  2. Do not borrow more than you can pay back within that amount of time
  3. Budget your loan repayment into your expenses

For More Information

Interest rates can be complicated and can lead people to make bad decisions about loans. However, once you know the answer to “how do interest rates work,” you will be prepared to borrow in case of an unexpected expense.

For more information on loans and to compare interest rates in South Africa check out our 100% free service!