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Are interest rate increases stretching your budget to breaking point? South Africans are facing the highest interest rates in over a decade and debt has become so much more expensive! But you are not alone, and help is at hand. Read on for advice from the experts on how to minimise the negative effects of higher interest rates on your debt.
How changes in the interest rate affect your monthly repayments
You know the drill, the higher the interest rate the more your debt costs. If you have a vehicle finance loan of R200 000 that is repayable over 24 months, at an interest rate of 6%, you will pay R8 864 per month. But, if the interest rate rises to 10%, your monthly repayments rise to R9 229.
When you have a vehicle finance loan, a home loan, or a credit card and store card, the extra interest you must pay can become unmanageable.
Managing your debt when interest rates are high
It's tough when interest rates rise, and you need to find more money to make repayments. But you can balance your budget! Here are three strategies you can use:
Pay off your debt
Your best way to minimise the negative effects of high interest rates is to pay off debt when you can, as soon as you can. Try to sacrifice spending on unnecessary items and use the extra cash to pay a debt. This will ease your debt burden and free up cash for your budget. And your credit score will thank you!
Top tips:
The free Cash Crunch online short course from Truth About Money, a 1Life Insurance initiative, will teach you practical ways to cut expenses and free up budget for debt repayments.
Or why not take the Ditching Debt short course? It will teach you how debt works and the difference between good and bad debt. You will also learn how to pay off debts using tried and tested methods. Plus, there are real-life stories from people who paid off their debts to motivate and inspire you!
Make payment arrangements with your creditors
If you cannot pay off your debt or afford repayments with higher interest rates, talk to your creditors. There may be ways to restructure your debts and loans, such as extending the repayment term, to make repayments affordable. Give them a call today to see how they can help you.
Consider debt counselling
If you cannot pay off debt or make suitable arrangements with your creditors, you can consider debt counselling.
Debt counselling, also known as debt review, is a legal process where a debt counsellor negotiates affordable repayment amounts and terms with your creditors for your short-term debts (not your home loan). If you are considering debt counselling, you should speak to a registered debt counsellor who will assess your debts and income and make sure you meet the criteria for debt counselling, such as having a regular income. Debt counselling can last a few years, during which time you won't be able to access any new credit. But your creditors won't harass you for payments and at the end of the process you will be debt free!
You can read more about debt counselling and choosing the right debt counsellor for you in this blog. And don’t forget that Truth About Money offers a debt management service to help you manage and pay off your debts including debt counselling, debt consolidation and debt settlement.
High interest rates are good news for your savings!
If you have savings that earn interest, such as a fixed deposit, money market account or call account, higher interest rates are a bonus! Your R30 000 savings at 6% can grow to R40 147 in 5 years. But if interest rates rise to 10%, your amount after 5 years increases to R48 315. Higher interest rates are great news for savers.
Unfortunately, when interest rates are low your savings just won’t grow as quickly, and you may need to save more for longer to reach your savings goals. This doesn’t mean you shouldn’t save when interest rates are low. Who ever said they saved too much?
When will interest rates go down in South Africa?
It’s difficult to forecast this with any degree of accuracy. Interest rates can rise and fall quite quickly! At the start of 2024 economists predicted that interest rates might fall in the second half of the year, but are now talking “higher for longer”, with possibly a small rate cut towards the end of the year. But – don’t hold your breath!
Make sure you can afford your debt, save and invest as much as you can
Debt can help you grow your wealth, such as when you buy a home or use your new vehicle to expand your business! As we have discussed, you can learn how to manage your debt well by making sure you can afford repayments at current and higher interest rates! And when interest rates are high, save as much as you can!