Interest fixed or linked?

You pay interest when you borrow money, so you must know how to negotiate and have a good credit rating, writes Susan Pletts.

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When you borrow money, the value of interest begins with the Reserve Bank, which sets the interest rate for commercial banks. Retail businesses like furniture and clothing shops borrow from commercial banks to have enough money to let you (the consumer) have an account with them. The commercial bank charges you more interest than it pays to make a profit.When a customer wants to take a loan from a bank or open an account with a shop or car dealer, the interest rate will be higher for a person who’s a credit risk (who might not repay the loan or account) than for a person with a good credit rating (who will pay the accounts regularly). This means you should always pay your account instalments regularly.The interest rate also depends on how strong the person’s asset base is. The value of the assets should be more than the debt (liquidity). The lending institution also wants to know if there’s collateral for the loan it gives you.

Collateral is security. Buy a car on hire purchase (HP), for example, and the seller will make you sign an agreement allowing them to repossess and sell your car if you don’t pay your instalments. The stronger your collateral, the lower your interest rate should be.Once your credit record is in order and you have decided on what collateral to give for the loan, you need to choose a “fixed” or “linked” rate of interest. Fixed means the interest rate doesn’t change for the duration of your repayment period. Linked means the interest rate depends on what the bank’s prime lending rate is. This is determined by the Reserve Bank rate, and when its the prime rate changes, your instalments change, and this rate could go up or down.A good business with a strong asset base could get a rate lower than prime. A risky business sometimes gets a rate much higher than prime.

Before deciding on a fixed or linked rate, get advice from a person in finance with an idea about whether interest rates are likely to go up or down during the time of your loan. Know how strong your business is and have good credit references when you negotiate your rate with the lender. There are credit bureaus that have your name listed if you haven’t paid an account, and banks or businesses have access to these records, so you can’t fool anyone if you’ve had a problem with repayments! Susan Pletts runs Wanyuka Consultants in KZN, which provides various services, including farming training and mentorship for emerging farmers in KZN. Contact her on 082 572 3724, or [email protected].     |fw

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