It is no secret that the last few months have be extremely difficult, where household income has been under extreme pressure – high cost of living, high fuel and food prices. For many households, income has remained the same, forcing them to prioritise spending and stretch every cent to make ends meet.
Add salt to injury, the Central Bank of Lesotho (CBL) recently announced a 75 basis point increase to the interest rate, in its efforts to curb the high inflation. This increase in interest rates will definitely add more pressure to households, particularly those with debt. But before I get carried away, let’s unpack a few terms to ensure we are all on the same page.
What is the CBL rate?
The CBL rate (also referred to as the base rate) is the rate at which commercial banks borrow money from CBL to meet their financial needs. The Monetary Policy Committee (MPC) as custodians deliberate and decide whether to increase or decrease the CBL rate, taking a number of factors into consideration. The CBL rate (previously 4.75%) is very important as it influences what is called the prime lending rate.
What is the prime lending rate?
The prime lending rate (previously 8.25%) is the rate that commercial banks lend money to their best customers who need credit facilities such as home, car or personal loans. The prime lending rate is the CBL rate plus 350 points (3.5%) per annum e.g. 4.75% +3.5% = 8.25%
Commercial banks can add a margin above the prime lending rate e.g., prime +8% depending on the type of loan facility, consumer risk profile and credit score. Ideally (from the borrower’s perspective), this rate should be as low as possible, because a higher interest rate would result in the borrower paying back more in terms of interest on the outstanding capital amount.
How does the increase affect you?
When the MPC decides to increase the CBL rate by 75 basis points (0.75%) at their meetings, the rate increased from 4.75% to 5.5%. An increase in the CBL rate led to a subsequent increase in the prime lending rate – increasing it from 8.25% to 9%. For people with loans, where the interest fluctuates – an increase in the prime lending rate means that their monthly loan instalment will increase.
Take Nthabiseng for example who takes out a personal loan of LSL250 000 as shown in the table below. Her bank offered her an interest rate of prime + 8%, payable over 60 months. Nthabiseng would pay a monthly instalment of LSL6 112.77, however, an increase in interest rates as discussed above means that Nthabiseng will now pay LSL100.37 more on the same loan.
Table 1: Nthabiseng’s loan calculation
| Before interest rate increase | After interest rate increase | |
| Loan amount (PV) | LSL250 000 | LSL250 000 |
| Loan term (n) | 60 months | 60 months |
| Interest rate (Prime +8%) | 16.25% | 17% |
| Monthly instalment (PMT) | LSL6 112.77 | LSL6 213.14 |
An important decision for Nthabiseng is to decide whether to take the loan or not. Where does she start?
A great starting point for Nthabiseng would be to look at her monthly budget and determine if she can still afford the monthly instalment.
How does the additional LSL100.37 impact her finances?
If her budget cannot accommodate increases in monthly instalments and she takes the loan, she will put her finances under financial strain. This could lead to her struggling to pay the full loan instalment on time or defaulting on instalments. Furthermore, additional interest rate hikes are expected later in the year, which will lead to higher monthly instalments. It is there important for Nthabiseng to determine if she will still afford the instalment should interest rates increase by another 25 basis points, where she will pay more on her loan.
I know that we are facing difficult times as a country. If there is a time for us to keep a very close eye on our levels of debt, track our spending and be responsible, it is now. As Robert. Schuller said – tough times never last, but tough people do. We are tough and resilient, I believe we will make it past these difficult times and come out at the other side stronger.
