Two lenders can both say “5%”, yet charge very different amounts. A rate on its own does not tell you how it is calculated or how long it runs.
Here is how to read an interest rate on a loan and turn it into rand.
What are the main ways to quote an interest rate?
| Quote | What it means |
|---|---|
| Per month | The rate is charged each month |
| Per year | The annual rate, often with monthly compounding |
| Fixed | Does not change during the loan |
| Variable | Moves with a benchmark such as the prime lending rate |
| Flat | Charged on the original amount for the whole term |
| Reducing balance | Charged on what you still owe, so it falls as you repay |
What does a monthly interest rate look like per year?
5% a month sounds small, but over a year it is much more. Simple means multiplying by 12. Compounded means adding each month’s interest to the balance.
| Monthly rate | Simple yearly | Compounded yearly |
|---|---|---|
| 2% | 24% | about 27% |
| 3% | 36% | about 43% |
| 5% | 60% | about 80% |
Short-term loans are quoted per month because they last weeks, not years. That is why the cost per rand is high even when the monthly rate is capped.
How much does flat vs reducing balance matter?
A flat rate is usually more expensive than the same number on a reducing balance, because you pay interest on money you have already repaid.
Here is a hypothetical example. You borrow R6,000 over 6 months at 2% a month, repaying R1,000 of capital each month.
| Method | Interest over 6 months |
|---|---|
| Flat, on R6,000 every month | R720 |
| Reducing balance, on what you still owe | R420 |
The flat method costs R300 more for the same “2%”. Always ask which method the quote uses.
What are the legal limits on an interest rate?
The National Credit Act sets maximum interest rates, initiation fees and service fees for different kinds of credit. For short-term credit, the cap is 5% a month on a first loan in a calendar year and 3% on later ones.
Caps for other credit, such as personal loans, differ, and some move with the repo rate. Check the National Credit Regulator for the current figures.
What does prime have to do with an interest rate?
Some loans, such as home loans and some personal loans, are priced as prime plus or minus a margin. When the Reserve Bank changes the repo rate, banks usually adjust prime, and your rate can follow.
A variable rate can rise or fall during the loan. A fixed rate does not change, which makes budgeting easier.
How do you compare two loans?
- Find the total repayment in rand on each quote.
- Subtract the amount you receive. That is the cost.
- Compare the term. A longer term raises the total cost.
- Check fees and insurance. They add to the total.
- Pick the cheaper one that fits your budget.
A lower monthly instalment often means a longer term and a higher total cost. Do not choose by the instalment alone.
What else affects what you pay?
- Initiation and service fees. See loan terms.
- Credit life insurance. See credit life insurance.
- Late payment charges.
- Your credit record, which can change the price within the legal caps.
For what a rate does on a real loan, see what a R1000 loan really costs.
How do you check the numbers?
Use the pre-agreement quote. It must show the total. If the numbers do not add up, ask the lender to explain. For disputes, use the Credit Ombud.
What does the same loan cost at different rates?
Here is R6,000 repaid over six months in equal capital instalments, at two different quotes. The first is a bank-style rate of 24% a year. The second is the 5% a month cap for a first short-term loan.
Interest only, before fees, so it is a calculation rather than a quote.
| Rate | How it is quoted | Interest over 6 months |
|---|---|---|
| 24% a year | 2% a month on the balance | about R427 |
| 5% a month | The legal cap on a first short-term loan | about R1,050 |
The monthly rate is two and a half times as high, and the interest in rand is about two and a half times as high too. That is the difference between a “small” percentage per month and a larger one per year.
Fees come on top of both, so the quote’s total repayment is the number to compare.
How much does a one-point rate change matter on a big loan?
On a long loan, a small change in the rate adds up. Here is a R1,000,000 home loan over 20 years at two assumed rates.
| Rate | Monthly instalment | Total interest |
|---|---|---|
| 11% a year | about R10,322 | about R1,477,252 |
| 12% a year | about R11,011 | about R1,642,607 |
One extra percentage point adds about R689 a month and about R165,000 over the life of the loan. That is why people watch the repo rate, and why it pays to compare quotes on large loans.
The figures use the standard instalment formula with an assumed fixed rate, so a variable rate would change them over time.
What questions should you ask a lender about the interest rate?
Before you sign, ask these six, and write down the answers:
- Is the rate quoted per month or per year?
- Is it fixed or variable? If variable, what is it linked to?
- Is interest charged on the original amount or on the balance?
- How often is interest added: monthly or daily?
- What fees come on top: initiation, service and insurance?
- What is the total repayment in rand, and over how many months?
The answer to the last question is the one that matters. If a lender cannot give you a total, it is a reason to slow down.
Why does the term change the interest you pay?
Interest is charged for the time you hold the money. A longer term means more months for interest to run, even if the rate is the same.
A loan of R20,000 at 20% a year costs about R4,430 in interest over 24 months and about R6,758 over 36 months, from the standard formula.
The longer term has a lower instalment, but it costs about R2,328 more. Use the shortest term your budget can carry, and avoid stretching the term only to make the instalment look small.
Frequently asked questions
What is an effective interest rate?
The yearly rate you actually pay once compounding and the way interest is charged are included. It is a better comparison tool than the headline rate.
Can my interest rate change?
If it is variable, yes. A fixed rate stays the same for the term.
Who sets the maximum rates?
The National Credit Act and its regulations set the maximums. The NCR publishes the current ones.
Is 5% a month legal?
For a first short-term loan, yes, as a maximum. It is expensive, so compare the total in rand.
What is the difference between an interest rate and the cost of credit?
The rate is one part. The cost of credit also includes fees and any insurance. The total repayment in rand shows the full cost.
Is a lower interest rate always the cheaper loan?
Not always. A lower rate over a longer term can cost more in total, and fees can outweigh a small difference in the rate. Compare the total repayment.
One free 5-minute form is sent to NCR-registered lenders. Each lender decides for itself and shows you the full cost before you sign.
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