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What Does Credit Actually Cost?

If used correctly credit can add positive value to your overall financial well-being.  But you need to ensure that you understand what the total amount is that you will re-pay and if that amount is reasonable for the need you want to use the credit for; whether it be for renovating your home, buying stock and equipment for your side hustle; or paying for your child’s education.

We have all seen the adverts to take a loan/buy something with credit because it only costs R250, R500, R1000 per month.

What does that mean and how much are you paying in total?

Let’s look at an example, say you would like to borrow an amount of R100,000 for a period of 5 years. The quote that you receive from the financial institution says that you get an interest rate of 15% and the monthly instalment is R2,508.46.

This is how the credit provider will calculate your instalment amount:

Capital (or Principle) amount, that is the actual amount that you borrow. In this instance, the amount of R100,000

Interest Rate, that is how much the financial institution is going to charge you for borrowing the money from them. The amount that is charged will depend on your credit score. You can easily check your credit status on the FNB App, under nav» Money – credit status or with any financial bureau. In this example, the interest rate is 15%.

Monthly Service fee, these are the fees that the financial institution will charge monthly to administer the loan. These normally range from R50 to R115 per month. In this instance let’s assume that it is R69 per month.

Initiation fee: That is the amount that the financial institution will charge for the loan documents and admin for starting the agreement. These are also around R1,000 per loan. Let’s assume that this one is R1,207.50.

Consumer Protection Plan (CPP): This is an insurance that will pay out and cover the outstanding amount on the loan in the event of death disability or temporary loss of income. Let’s assume that in this instance it is R324 per month.

All these amounts add up to the total cost that you will pay for the loan over the term. Let’s look at the total amount that you will pay for this loan:

R100,000 + R50,507.60 = R150,507.60

Capital amount + Interest/Fees = Total amount payable over the term of the loan

Remember to include the repayments of any loan into your monthly budget, you can keep track of your budget on FNB Smart Budget under nav» Money on the FNB App.

By Ester Ochse, Product Head, FNB Money Management