All you need to know about the interest rate

In the latest instalment of our Street Smart series, brought to you by Absa Vehicle and Asset Finance, Jacob Moshokoa explains how the interest rate affects your car loan repayments and how you can be prepared to deal with financial upheavals.

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Finance is scary and, let’s face it, a contract can feel like something that your ex’s divorce lawyer drew up. So, before you buy something that you may end up having to sleep in, let’s investigate a little more.

In case you missed it, watch Episode 1: How to deal with vehicle finance repayment challenges

Can you afford a new car?

So, you have your eye on a sexy new car – great. But before you make a shortlist, visit showrooms and go for test drives it’s important to take a long, hard look at your finances.

Everything has become so expensive and costs add up. Now, very few people (apart from the smartest ones of all) know why stock markets react like an insane border collie with ADHD every time a coconut falls off a tree on some small island, but the reality of the world is this: it’s a financially volatile place.

While there are some events that we just can’t plan for or explain, it’s important to understand how all these things affect your wallet, and the biggest culprit out there is the INTEREST RATE.

How will the interest rate affect your spending power?

When it comes to financing, the interest rate is the difference between eating pre-made schnitzels for dinner at the end of the month – or house-brand baked beans on toast.

The interest rate affects everything… Credit cards, home loans, car instalments, clothing accounts, everything that you must pay off.

In a nutshell, when the interest rate goes up, you pay more for your credit, and when it goes down, you pay less. And, you need to make sure that you are prepared for all the bumps and scrapes.

There are so many factors that affect the interest rate: inflation, wars, financial markets, the value of the dollar, what the Kardashians wore last Thursday etc. Honestly, there’s nothing you can do about it.

But you can prepare yourself for interest rate fluctuations, because your financial life could get as bumpy as a ride in the back of a beat-up jalopy as it bounces its way over a road full of potholes.

Some points to bear in mind about the interest rate

The type of interest rate that you choose is important. A fixed rate gives you the security of paying a set amount for the loan without having to ride the rollercoaster interest rate hike cycle on which most of South Africa finds itself now – great. But, a linked interest rate will benefit you when the interest rate comes down again and your buddies are stuck paying a higher fixed interest rate.
Save. Save. Save. You need to aim at saving at least 20% of your earnings. Do whatever it takes. You don’t need to subscribe to so many streaming services. Also, stop buying lattés every morning and get a flask. Save as much as you can. There is no way around this. The more you save, the less money you’ll need to borrow. The less interest you pay, the quicker you pay off your stuff.
Have a budget; know exactly where your money goes. Keep track of what your bank fees are, the costs of food, electricity, petrol and so on – everything that you habitually spend money on. Budgeting is the one surefire way to get control of your finances. Do it… budget every single cent.
Stop trying to save money now and again in the hopes of being prepared for “a rainy day.” No, that usually fails – having a firm grasp on your spending and saving habits is the only umbrella you need.

Now you understand how the interest rate affects your car finances. You’re budgeting properly and saving at least 20% of your earnings, or you’re at least a daily coffee shop muffin away from that goal.

Great. So, now ask yourself – can you truly afford the car that you want to buy, or should you lower your expectations a little? Fortunately, your bank could help you find a great car suited to your budget…

Explore the various ways in which Absa can help you find, finance and even insure your next car

Okay, that’s enough scary finance talk for now. Now, go watch that review of the latest and greatest coupe while you try to convince yourself it’d be the perfect family car!

For extra information on how you can become a better consumer, keep a lookout for more episodes from our Street Smart series and be sure to visit the Absa blog.

Earlier episodes in our Street Smart video series:

Asba’s Deen Govender details how the interest rate on your loan is calculated.

Absa’s Pascal Siphugu explains the importance of value-added insurance products.

Absa’s Chelton Keppler chats about dealing with challenges to meet your vehicle-finance loan repayments.

Absa’s Sarvas Naidoo and CMH’s Joel Chetty about balloon payments.

Absa’s Fulufhelo Mandane and Hatfield VW Melrose’s Vleis Manyama explain the importance of getting and maintaining an acceptable credit score.

Absa’s Sbu Dhlamini explains the most pertinent terms in an instalment sale agreement. Understanding your instalment sale agreement [Part 1] and [Part 2]

Absa’s Michelle Moodley emphasises the importance of taking precautions to avoid falling into fraudsters’ traps. Vehicle Sales Fraud: What to look out for

Absa’s Fulufhelo Mandane discusses what you need to consider before you start shopping for a vehicle, the costs of ownership and your various finance options. Absa First-time Buyer Guide to Vehicle Finance

Absa’s Gordon Wood details how the new Aftermarket Guidelines, which were introduced in the motor industry last year, affect you as a vehicle owner. Absa’s Guide to Responsible Vehicle Ownership