The lowest advertised rate is not always the cheapest loan. Two offers with similar rates can cost very different amounts once fees and the repayment term are added. Here is how to compare them properly.
Why “from” rates can mislead
Advertised rates are often “from” rates, meaning the best rate for the best customer. Your own rate depends on your credit profile, income and the lender’s risk assessment. You will only see your personal rate on your quote.
Rates are regulated
The National Credit Act sets maximum interest rates and fees that credit providers may charge. A lender cannot lawfully charge more than the caps, so if a quote looks far above what you would expect, ask why and check the lender’s registration.
What makes up the real cost
- Interest rate: Charged on the outstanding balance.
- Initiation fee: A once-off fee for setting up the loan.
- Monthly service fee: Charged every month for the life of the loan.
- Credit life insurance: Optional or required cover, depending on the lender, which adds to the instalment.
Compare on total cost
- Ask each lender for a written quote.
- Use the same loan amount and term for each quote.
- Write down the monthly instalment.
- Multiply the instalment by the number of months.
- Subtract the amount you borrowed to see the total cost of credit.
The loan with the smallest total cost is usually the better deal, as long as the instalment fits your budget.
The term trap
A longer term lowers your monthly instalment, but you pay interest and service fees for longer. A shorter term costs more each month but less overall. Pick the shortest term you can comfortably afford.
Questions to ask a lender
- Is the rate fixed or variable?
- What fees apply, and are they added to the loan?
- Can I settle early, and is there a fee?
- Is insurance compulsory?
FAQ
Do banks always charge less than other lenders? Often their starting rates are lower, but approval depends on your profile. Compare actual quotes rather than assuming.
Does a variable rate change my instalment? It can, if the rate is linked to the prime lending rate and prime changes.