How are personal loan interest rates calculated? 
Personal Loan Interest Rates

Interest rates can be a difficult thing to understand, especially if you don’t come from a financial background. However, you’ll need to fully come to terms with how interest rates are calculated before you apply for a personal loan. Read further on to find out how personal loan interest rates work in South Africa (don’t worry we will keep it simple so you are able to make better financial decisions).   

What is a personal loan?  

A personal loan is a type of credit you can receive from a lender. The borrower will take out this type of loan for one-off expenses, from an upcoming wedding to furthering your studies.  A personal loan is generally an unsecured loan, meaning it isn’t backed against a property or other form of assets.   

How much can I borrow?  

Obviously, this depends on many factors, including your salary, credit score, and spending habits. Personal loans generally range from R1 000 to R250 000.   

Need help finding out what your credit score is? Use MyFincheck to get your credit score in minutes.   

What are the terms of a personal loan?  

This again depends on a number of factors and varies from lender to lender. Your repayment period can range from a minimum period of 3 months to a maximum of 72 months.  A pretty standard contract term across the board is that you’ll need to make monthly instalments over the loan period.   

How is personal loan interest calculated?  

The moment you’ve been waiting for – calculating your personal loan interest rate.  

When you take out a personal loan, you will obviously want to know how much you will have to repay in interest. This can be difficult to calculate without knowing the exact interest rate that you will be charged. You may also want to know how this is calculated. It’s important to look at the fine print, your annual percentage rate (APR) is the best indicator of determining your interest rate.   

There are many different factors that influence the interest rate you’ll receive on your personal loan.   

5 factors that determine personal interest rates:  

Credit score 

Your credit score forms a pretty big part of interest rate calculations. Make sure you maintain a good credit score to keep interest rates low.  

Loan amount 

Your principal loan amount is a pretty big contributor in determining your interest rate. The bigger the amount, the bigger the risk that the bank or lender is taking.  

Loan term 

Both short-term and long-term loans have their pros and cons. If you take out a short-term loan you’ll likely pay higher interest rates. Compared to a long-term loan which will have a lower monthly interest rate, but a higher total repayment cost because of the total build-up of the interest in Rand amounts.   

Payment schedule 

Whether you’d prefer weekly vs monthly loan repayments. Obviously paying off the loan as quickly as possible is best as less interest will accumulate. However, in most cases, people get a loan because they can’t afford to pay it off quickly.   

Monthly income 

Your income is taken into high consideration by lenders when calculating the personal loan terms. If you have a high income you’ll qualify for better interest rates compared to a lower-income borrower.  

Personal Loan Interest Rates Example in practice:  

Loan Amount  Repayment Term  Monthly Repayment  Total Repayment  Maximum Interest  Minimum Interest  
R30,000  12 Months  R3,313  R39,756  28%  16%  

Simple interest example  

Let’s say your interest rate is 16% on a R30 000 loan, which is taken out over 1 year. Here is the formula you’ll use – R30 000 x 0,16 x 1 = R4 600   

R34 600 ÷ 12 = R2883,3 monthly repayment.   

Personal loan interest rate calculators:  

If you aren’t as interested in the math behind calculating your personal loan, not to worry. There are a number of different comparison services and lenders that can help you calculate personal loan interest rates. These include:  

Loan comparison platforms: 

Lender personal loan calculators:  

In conclusion, your personal loan interest rate is determined using multiple different factors. Knowing your interest rate gives you a good starting put to decide what you can afford. Now that we’ve given you the financial insight on personal loan interest rates, it’s time to dive in and apply for one suited to your needs.    

Helpful financial jargon:  

APR (Annual percentage rate) – this is a yearly form of interest, charged on your credit. Your APR determines how fast credit will accumulate on your debt.    

Simple interest – your interest rate, in this case, will be calculated on your principal loan amount over a period of time. Your principal loan amount will remain the same, and your total repayment amount will be calculated using this interest.    

FAQs  

Which bank has the lowest interest rate for personal loans?  

We’ve done the legwork and rounded up the five best banks leading the way for low-interest personal loans in South Africa.  

How do I apply for a personal loan?  

Most lenders or comparison sites have made the process as simple as possible. At Fincheck all you’ll need to do is fill in the 3 step process and you’ll have loan offers in minutes. Each lender has a similar application process, you’ll need to supply your personal details, bank statements and proof of income.     

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Article at a glance

How are personal loan interest rates are calculated? Find out how lenders determine the interest rate on your loan and how you can pay less interest on your loan.

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