If the prime lending rate is phased out, what does it mean for consumers?

FOR over two decades, the prime lending rate has dictated the cost of consumer finance in South Africa.

- THERESE GROBLER

Whether you're signing for a new car, a first home, or a personal loan, the conversation almost always revolves around “prime plus" or "prime minus.” Yet very few consumers are ever encouraged to understand what those terms actually mean, or how interest rates are constructed.Speaking at Davos, South African Reserve Bank (SARB) Governor Lesetja Kganyago said the prime rate would potentially be phased out in line with the bank’ current reform drive. While this might sound like technical jargon, it presents an important opportunity to improve how consumers understand the true cost of borrowing.

What exactly is the prime lending rate?

To understand the change, we have to look at the current "350 basis point" rule. In South Africa, currently, there are two main rates. The repo rate is the interest rate at which the SARB lends money to commercial banks (currently 6.75%). The prime rate is the benchmark rate banks use to lend to the public (currently 10.25%).

The shift to a repo-plus model