Third consecutive interest rate cut not an opportunity to take up more bad debt

Johannesburg - For many South Africans who started the year looking for ways to simplify their debt management or reduce financial strain, the recent decision by the South African Reserve Bank’s (SARB) to lower interest rates by 25 basis points for the third time in six months may provide some much-welcomed relief.

"The high-interest rate environment of the past couple of years affected the cash flow of many South African households,” says MJ Davis, FNB Retail Loans CEO. “And consumers are counting on these rate cuts to offer them some financial reprieve, as they continue with their money management efforts.”

Reduced borrowing costs and lower monthly repayments due to rate cuts have tremendous potential to free up cash flow and potentially prevent the average person from falling into any further financial distress.

That said, Product Head at FNB Integrated Advice Ester Ochse warns consumers not to fall into complacency. “We need to be very careful and disciplined. While lower rates make borrowing ‘cheaper’ in the short term, consumers shouldn’t be tempted to get into further bad debt which could put one in a worse-off financial position in the long-term.

We don’t know for sure what will happen with interest rates but at some point, they will rise again, making debt instantly more expensive again. Therefore, it’s wise for consumers to assess their ability to manage debt, cautions Ochse. “In general, if you are already stretched financially, further debt could lead to more instability if you don’t have a solid repayment plan or aren’t borrowing for productive reasons like investing or saving,” she adds.

Ochse also notes that lower interest rates also mean lower returns on savings. “While it might feel like you can spend a lot more freely, don’t forget to pay yourself in savings first, before you spend your money elsewhere. You can’t afford to fall behind on your savings. In fact, add a little more to your savings pot monthly now that you have some extra cash flow.”

While the lower interest rate environment may facilitate paying less interest on the debt you owe, Ocshe says if you want to get out of debt faster, try to pay higher installment rates as this will save you interest in the long run. Adding to this, Davis points out that interest on debt is something that most of us don’t fully understand.

“The reality is that retail store cards for things like clothing or furniture carry higher interest rates than bank credit cards, for example. So, consumers should fully acquaint themselves with the terms and conditions of having these types of facilities,” highlights Davis.

Ochse also advises that it’s better to save for items that you may not be able to afford right now through savings, group savings or stokvels rather than taking out high interest-bearing store cards. “We see that stokvels work wonderfully and can serve a variety of needs including saving up for funerals, groceries, school uniforms and, at times, even for investments.” This round of rate cuts presents a silver lining for some but for others, it might be difficult to see the tree for the woods.

“You’ll often find that the average person is trying to keep up with an accumulation of multiple unsecured credit products, such as store cards, retail accounts, and other types of loans from varying providers - all with varying amounts, and with varying interest rates. It can be seriously overwhelming,” emphasizes Davis.

Should you find yourself in this position, your first port of call should invariably be reaching out to your financial institution.

“I think, when people start feeling mild signs of distress, their first instinct is often to hide in shame or sit on the situation and pray that it will somehow work itself out. Yet, as a financial services provider focused on providing real help to our customers, we encourage individuals to understand that we exist to help them find solutions to any challenges they might face as it relates to their finances,” he adds.

For every financial challenge one may face, Davis says there likely is a solution. A quick chat with your bank could reveal avenues for simplifying your finances.  

“It’s easy to lose track of different repayment schedules, interest rates, and fees. But what if I told you, for example, that in a situation where you have multiple debts that you’re trying to service and manage, there is a possibility of getting them combined so that you’re dealing with one single account fee?” This option is already available at FNB, but if you don’t keep lines of communication with your financial services institution you might not have ever known.

“Helping customers who are in financial distress by consolidating all their loans and facilities from various providers into one easy-to-manage loan with a single monthly fee and a personalised interest rate is exactly what the FNB Credit Switch product does” Davis reveals. “Now imagine where and how you could channel your newly freed-up cash flow coming from reduced monthly premiums?”

Neither the SARB’s interest rate cut nor banking products like FNB’s Credit Switch are quick fixes for poor management of personal finances. It’s important to carefully evaluate your options when you are in financial distress, work towards implementing the fundamentals of sound money management principles, and ensure you speak to your financial services provider about your concerns.