5 ways to delegate effectively
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Interest rates have a significant impact on our finances, so it is vital that we understand how to make them work for us.
An interest rate is the cost you pay to a lender when borrowing money.
In our economy, the interest rates originate from the bank rate or repo rate, which is the interest rate at which the Reserve Bank lends to the commercial banks – currently at 6.75%. This is not the interest rate that consumers pay. The commercial banks add more percentage points to the repo rate to determine the prime rate – the rate at which a bank will lend money to its top (lowest risk) clients. Since November last year, the prime rate has been 10.25%.
Most consumers pay a rate even higher than prime. This is expressed in lending agreements as, for example, ‘prime + 1%’. This is called a variable, floating, linked or fluctuating rate because, as the repo rate increases or decreases, so will the interest you pay. For example, if you have a loan agreement with a variable rate of ‘prime + 1%’, you will now be paying 11.25% (10.25% + 1%) on that loan. However, if the Reserve Bank raises the repo rate, the prime lending rate will also rise and the interest you pay on your loan will also increase.
Some loan agreements, such as a home loan, allow you to negotiate a fixed rate that is not linked to the fluctuating prime rate. However, this comes at a cost.
When consumers pay less interest, they have more money to spend, which can create a ripple effect of increased spending throughout the economy.
The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars, which stimulates the economy. Conversely, the higher the rate, the more interest you earn on your savings. In addition, when it rises:
The information is shared on condition that readers will make their own determination, including seeking advice from a financial professional. E&OE.
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