How the recent repo rate change affects your car loan

The South African Reserve Bank (SARB) recently reduced the repo rate by 25 basis points to 7%. This change has left consumers asking how interest rates impact their car loans.

According to WesBank's Head of Marketing and Communication, Lebo Gaoaketse, the repo rate serves as the interest rate at which the SARB lends money to commercial banks.

"Changes in the repo rate directly affect the interest rates banks extend to consumers, known as the prime interest rate. When the repo rate escalates, banks face increased borrowing costs, often passing those costs onto consumers in the form of higher loan interest rates. Conversely, a reduction in the repo rate typically lowers borrowing costs, leading to decreased loan repayments," he said. 

Gaoaketse explained that the repo rate plays a significant role in determining vehicle finance affordability. 

Fixed vs linked interest rate vehicle finance

• Fixed interest rate vehicle finance: This agreement ensures that the interest rate remains unchanged for the entire loan term. Regardless of fluctuations in the repo rate, monthly repayments stay consistent. While fixed rates offer stability and peace of mind, they may entail slightly higher initial rates, making them an attractive option in a low-interest-rate environment to maximise potential future savings.
• Linked interest rate vehicle finance: This structure ties the loan’s interest rate to the prime lending rate, which fluctuates alongside changes to the repo rate. As interest rates fall, repayments can decrease; however, they also rise when the repo rate increases. While linking interest rates may provide some relief during periods of falling rates, borrowers should be prepared for fluctuations in repayment amounts as they align with economic trends.

“Choosing between fixed and linked interest rates depends on your financial situation and appetite for risk,” added Gaoaketse.

“Each option has its advantages, and our consultants are available to help customers select the right fit for their specific situation and needs.”

To illustrate the differences, consider a linked interest rate vehicle loan of R300,000 over 72 months with no deposit or balloon payment:

• With the current prime lending rate of 10.5%, monthly repayments would approximate R5,725.
• Earlier this year, when the rate was 0.5% higher, the monthly instalment would have been R5,802.

Although the monthly repayment difference appears modest, just R77 per month, the savings over the loan's full term could amount to R5,532. For those on fixed-rate loans, however, repayments remain unchanged regardless of interest rate adjustments.

Advice to consumers

• Review your loan agreements to determine whether your interest rate is fixed or linked.
• Budget for potential fluctuations if your loan is linked to the prime rate.
• Explore refinancing options in a lower interest rate environment to save over the loan term.

Gaoaketse said interest rates are an important factor in South Africa’s economic landscape, affecting all indebted consumers.

"Whether on a fixed or linked finance agreement, the repo rate will impact the agreed interest rate on your loan."

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