19 Oct How Secured Loan Interest Rates Work in SA

If you have ever compared loan quotes, you will have noticed that a loan backed by an asset often comes with a lower interest rate than one that is not. That is not a marketing trick. It comes down to how lenders price risk, and understanding it puts you in a much stronger position when you borrow.

At Loan Wave, our secured loans in South Africa let you put up an asset as collateral, which gives us less risk to price in and can bring your rate down. Here is how secured loan rates are worked out, what moves them, and how to land a better deal.

What Is a Secured Loan Interest Rate?

Interest is the price you pay for borrowing money, expressed as a yearly percentage of what you still owe. On a secured loan, that price is attached to a loan backed by something valuable, such as a vehicle. If the loan is not repaid, the lender has the legal right to claim that asset to recover what is owed.

Because that safety net exists, the lender can afford to charge less than it would for credit with nothing behind it. For a full side-by-side look at both options, see our guide on how secured and unsecured loans work.

How Secured Loan Rates Are Set

Every lender starts from the same place: the cost of money in the economy. The Monetary Policy Committee of the South African Reserve Bank decides on the policy rate, still widely known as the repo rate, six times a year. Banks set their prime lending rate 3.5 percentage points above it, so when the policy rate moves, prime moves by the same amount.

Lenders use these benchmarks as a starting point, then add a margin that covers their own running costs and the risk that a particular borrower may not repay. The stronger the protection behind the loan, the smaller that risk margin needs to be, which is exactly where collateral comes in.

Why Secured Loans Usually Cost Less Than Unsecured Credit

Think of it from the lender’s side. With an unsecured personal loan, the only thing the lender can rely on is your promise to repay and your credit record. If things go wrong, recovering the money means legal action and a long wait. With a secured loan, there is an asset that can be used to settle the debt.

Lower risk for the lender translates into lower secured personal loan rates for you, and often a higher borrowing limit as well. The trade-off is just as real: if you default, you could lose the asset you put up, so a secured loan only makes sense when you are confident you can manage the repayments.

What Moves Your Rate

No two borrowers get exactly the same rate. These are the factors that count most:

• Your credit profile. A cleaner payment history signals lower risk and usually earns a better rate. If your record is not perfect, you can still get a loan with a bad credit score, although the terms may be less favourable.
• The asset you offer. Lenders look at its value compared with the loan amount, as well as its age and condition. An asset worth comfortably more than the loan is better protection. Loan Wave can even offer finance for cars older than 10 years, which many traditional lenders will not touch.
• The loan term and amount. Larger loans over longer repayment periods expose the lender for longer, so the rate can be higher, and you will pay more interest in total even if the monthly instalment looks smaller.
• Fixed or variable. A variable rate moves when the policy rate and prime change, while a fixed rate stays put for the length of the agreement. Your pre-agreement quote will show which one applies.

How the National Credit Act Limits What You Pay

Lenders cannot charge whatever they like. The National Credit Act and its regulations set maximum interest rates for each category of credit agreement, calculated with a formula linked to the repo rate. The formula for unsecured credit allows a higher ceiling than the formulas for categories such as mortgages and other credit agreements, which is another reason secured borrowing tends to work out cheaper.

Lenders must also run an affordability assessment, so credit is only granted when you can comfortably manage the repayments.

Tips for Getting a Better Rate

• Check your credit report before you apply and dispute any errors.
• Make sure you understand how interest is worked out on a personal loan, so you can compare the total cost of credit and not only the headline rate.
• Offer an asset that comfortably covers the amount you want to borrow.
• Borrow only what you need and choose the shortest term you can realistically afford.
• Brush up on how to qualify for a personal loan so your documents and affordability are in order before the assessment.

Secured loan interest rates are not a mystery. They reflect the cost of money, the lender’s risk and the protection behind your loan.

If you have an asset to put up and want to see what rate it can unlock, Loan Wave assesses every application individually, and once your asset and affordability are verified, funds are typically paid out within a day or two of accepting your offer.