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A cut in interest rates provides an opportunity for consumers to get out of debt sooner if you know how to use it to your advantage. Read on!  


What Are Interest Rates and How Are They Determined?

Interest rates are the rate at which banks allow consumers to borrow money from them. The South African Reserve Bank (SARB) determines a prime rate and this is the rate at which it lends money to banks. In turn, banks charge the prime rate plus an additional percentage based on the risk profile of a lender. A drop in the interest rate will thus result in a lower monthly home loan and vehicle repayment for South African consumers. Similarly, if they rise, the amount you pay back each month will increase. Although lower interest rates make it cheaper to borrow and reduce monthly payments it also reduces the interest earned on bank deposits. If you fixed your interest rate on certain loans the monthly payments will not be reduced.


How Can I Make the Most of An Interest Rate Cut?

Lower monthly payments mean you will have more money in your pocket. It may not seem like much but for a consumer struggling to keep head above water, it will make it a little bit easier to pay down their debts. It also provides an opportunity for consumers to get themselves out of debt sooner. You can do this by leaving monthly repayments fixed to reduce debt as quickly as possible. Keeping your repayments fixed can drastically reduce your repayment duration and you will ultimately pay significantly less in interest. This will, in turn, mean that you will have additional cash flow earlier than expected which you can utilize for saving or paying off other debt. It is also advised to channel excess cash towards savings for emergency situations. An interest rate cut also means that individuals can borrow more cheaply if they needed to. Cuts in interest rates typically lead to increased consumer spending. It is however advised that instead of increasing debt consumers should decrease their overall debt.  


How Can I Avoid Paying High Interest?

Banks charge the prime rate plus an additional percentage based on the risk profile of a lender.  So, the interest rate you receive depends on your credit record. If you have a bad credit record the bank will see you as high risk and will charge you a higher interest rate. Banks may offer you a lower interest rate if you have a good credit record seeing that your risk to the bank is lower. You can improve your credit record by making sure you always make debt repayments on time and by keeping your debt under control.