How loan interest and fees work

Understand interest rates, prime and repo, initiation fees, service fees, credit life and total cost of credit on SA loans.

• The instalment isn't the whole story. Compare the total amount repayable.
• Longer terms lower the instalment but increase total interest.
• Fees and credit life insurance can add a lot on smaller loans.

Repo, prime and your rate

The South African Reserve Bank sets the repo rate. Banks set their prime lending rate from it (historically repo plus 3.5 percentage points). Home loans are priced around prime. Unsecured loans are priced higher, up to the legal cap of repo plus 21%.

Fixed vs variable

A variable rate moves when the repo rate changes. A fixed rate stays the same, which makes budgeting easier, but it is usually set higher to begin with.

The costs in a loan

• Interest: charged monthly on the outstanding balance.
• Initiation fee: a once-off fee, often added to the loan.
• Monthly service fee: up to R60.
• Credit life insurance: covers the debt if you die, become disabled or are retrenched.

Why term matters

R30,000 at 24% costs about R1,586 a month over 24 months (R38,060 in total) but about R863 a month over 60 months (R51,780 in total). The lower instalment costs over R13,000 more. Use our calculators to test your own figures.

What is the total cost of credit?

Everything you repay minus the amount you borrowed: interest, fees and insurance. It must appear on your quote.