Our Guide to the Basics of Interest for South African Borrowers

January 09, 2020

All throughout an average South African’s life, the idea of “interest” comes up in many ways, whether it be in a relationship or purchasing a used item. Yet, this term is most often associated with loans.

The majority of the South African population, in one way or another, has experienced the process of applying for a loan and paying for it every month. Although getting a loan may be common, most of the country’s borrowers continue to apply without even understanding how interest rates affect them in the first place. 

Fortunately, understanding the concept of interest isn’t as complicated as it may seem. In fact, knowing your way around the concept and becoming an even smarter borrower doesn’t take more than having knowledge of basic concepts! 

Why is it important to know about interest?

Generally speaking, having proper knowledge regarding interest and how it works can help with preventing any potential financial problems in the long run. Once you’ve learned the basics of interest and how it works, you can effectively avoid getting caught in a poor financial deal because you’ll know what should be and shouldn’t be during a deal! 

The fundamentals of interest

First, it is important to understand that interest is a lender or bank’s way of making money off of a loan as it provides them with some income after every repayment. Given the fact that nothing is truly ever free, the interest is what a bank or lender makes from lending you a certain amount of money. 

Thanks to the inner workings of interests, it allows a certain amount of money to multiply through the value of mutualism. This essentially entails you getting the amount of money you need while a lender gets a bit of income in return as well. 

How does interest work?

It is worth noting that a certain amount of money has to be borrowed for a bank or lender to accrue a significant amount of interest. Most forms of interest accrue at a pre-determined rate, which depends on the terms that you’ve agreed upon with a lender or bank. The general number for standard interest rates lie anywhere between 3 to 10 per cent of interest on top of the amount that you’ve borrowed, which is also known as the principal.

To better understand how interest exactly works, let’s look at this quick equation:

Let’s say that you’ve taken out an R50,000 loan at a pre-determined interest rate of 5 per cent per annum. In this case, the amount of interest a bank or lender can make off of your loan is determined by multiplying that 5 per cent interest rate (0.05) by the principal of R50,000, resulting in 2,500 of accrued interest that you’ll end up paying for.

Can you make money off of interest?

When it comes to taking out a loan, it’s best to assume that a loan provider will be the only party that can make money off of interest since they’re the ones who are lending out money. Alternatively, you can also make money off of interest by using a savings account with a bank that offers small margins of income per annum (which usually ranges from one to two per cent). 

Understanding interest may seem like a complicated topic at first, but the reality of it all is that it’s a fairly simple concept. Before you take out your next loan, make sure to calculate for the projected amount of interest payable to better gauge whether or not it’s the best option for your financial capabilities! 

If you are looking for online loans in South Africa, get in touch with Hoopla Loans today to see how we can help.