Linked or fixed interest rate? Which is better?

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kewalp

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i am buying a new car. i have been offered a linked interest of prime + 0.5% so at the current interest rate that would be 9.5% and a fixed interest rate of 10.5%. which is better with the current situation of our economy
 
I always opt for a linked product if you have a little breathing room in your budget. If your budget it tight and you would rather pay for peace of mind then go fixed.

They are not expecting any significant interest rate hikes for a while, we may even have an outside chance of a reduction in rate in the short term.

Last time interest rates were at or above 10.5% were back in August 2009.
 
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It depends on which way the repo rate goes and the term of the loan.

Currently the financial boffs don't think there will be a rate hike before the end of next year and in fact there is speculation that there may be another 50 basis point drop early next year.
Personally I doubt whether the rate will increase by more than 1 percent in the next two years.
If your term is short (like 2 years) then go with the linked interest rate.
If the term is 6 years then 10.5% doesn't sound like a bad hedge against inflationary pressures.
The inflation cycles are typically around 5.5% on average so it all depends on the risk you're willing to take.
 
the term is for 60 months.....i do have a little breathing space in my budget....by little i mean very little.....but i am planning to pay in a couple hundred rand more than is required by the monthly repayments......hence reducing my debt faster
 
Contrary to the other two, I've heard that they are expecting interest rates to go up a bit over the next 3 years if the current economic climate continues. This is just hearsay, so I might be wrong.

Personally I think 10.5% is a very good fixed rate (usually they make fixed rates quite a bit higher), so I'd go for that with a term of 60 months.
 
however it would take a 100 base points increase to catch up from 9.5% to 10.5%......and they normal increase the rate 50 base points at a time.....hence i am not sure.....i need to make a decision today :(
 
so after some research the repo and prime rates are at a 30 year low.......they have never been this low for the last 30 years......question is with inflation just under the 6% mark is their room for the repo rate to drop further?
 
Frikkenator said:
Contrary to the other two, I've heard that they are expecting interest rates to go up a bit over the next 3 years if the current economic climate continues. This is just hearsay, so I might be wrong.

Personally I think 10.5% is a very good fixed rate (usually they make fixed rates quite a bit higher), so I'd go for that with a term of 60 months.
Click to expand...

lets see, fixed you will pay about 2% more from day 1. lets say its 5 year loan. if after 2 years it goes up by 2%. you have saved 24 payments worth of the difference. it then has to go up ANOTHER 2% and be at this 4% more than now rate for at least 2 years before you would have paid the same amount of interest as you will pay with the fixed rate.

There is no indication at all that it will go majorly up in the next few years, meaning taking fixed interest will cost you a fortune more than you would have to pay. But hey if you go for it, you probably buying a corolla... :)
 
so i have spoken to two friends in the banking industry......they both said they dont see interest rates increasing in the near future.....if interest rates increase it would take atleast 2 or 3 rate increases to catch up......so chances are the linked interest is better.......im buying a vw polo :)
 
so i have spoken to two friends in the banking industry......they both said they dont see interest rates increasing in the near future.....if interest rates increase it would take atleast 2 or 3 rate increases to catch up......so chances are the linked interest is better.......im buying a vw polo :)
 
even if it does increase, its much better to have a low interest rate for the start of your loan, towards the end an increase in % makes much less of a difference
 
Here are some interesting stats from Wesbank car finance calculator. This is a rate per 100,000 borrowed over 60 months. No residual or balloon payments.

At 9.5%
Interest paid: 26011.17
Instalment: R2100

At 10.5%
Interest paid: 28963.40
Instalment: R2150

My suggestion is if you can afford 10.5% interest then opt for the prime linked account but pay in what you would be charged at 10.5. This way you are reducing capital faster and hedging against a move as should it change dramatically the additional payments would counter this significantly.
 
Here is an interesting question that I pose on this subject:

As we know Interest rates are linked to CPI (which needs to be within the 3 - 6 % target range) and MPC uses interest rates as a means of reducing spending and therefor inflation but has anyone done a working to see which situation is better for the average blue collar moderate earner.

Take the two scenario’s
1) High inflation - Higher interest rates, higher cost of living but also higher salary
2) Moderate inflation - consistent interest rates, moderate living cost increases and moderate salary increases.

There must be a point which correlates earnings to borrowings where each scenario is a winner, I wonder where that is...?
 
@DrWho i wouldnt have a clue.... i am actually very bad with the finance industry as i have no finance knowledge......but i think your comment earlier makes sense....taking the linked interest rate at 9.5% and pay in as if it were 10.5%......the only concern i really have is that the current repo and prime interest rates are at the lowest in the last 30years ......so do i fix my interest rate or take a risk and hope that it still has to drop more and not increase
 
Trying to predict interest rates is like trying to predict the end result of a rugby match. All the statistics and experts may point to a certain result, but on the day, anything can happen!

I think you have one of two choices:

1. Do you want peace of mind for the next 60 months? If yes, go for a fixed price as you will know what to budget every month

2. Do you want to risk/gamble for a slightly lower overall payment? Take the prime-linked offer.

No one can tell you what the interest rate will do, although we all have our opinion (mine is that it will be flat for another year or so before it starts climbing). You can work out scenarios to see by how much and fast the prime lending rate must climb before it becomes a bad choice, but in the end, it remains a gamble (albeit it slightly more informed that roulette!).
 
@ssslik......how do i do these calculations to see when it becomes a bad choice?
 
I have always gone linked, but it is seldom that you will find such a small gap between fixed and linked, making fixed actually a tempting option in this case.
 
Lets take R100 000 example

If we fix at 10.5%, we pay R2150 per month for 60 months
If we fix at 9.5% we pay R2100 per month for 60 months.

If we variable at 9.5% we pay R2100 for 12 months, then say have a .5% increase
We then pay R2120 for 12 months, then we have a 0.5% increase to 10.5%
We then pay R2140 for 12 months, we then have 0.5% increase again to 11%
We then pay R2145 for 12 months, we then have 0.5% increase again to 11.5%
We then pay R2150 for 12 months and we done.

So with 9.5% fixed we end up paying R126 000 back.
With 10.5% fixed we would end up paying R129 000 back.
With 9.5% linked and a 0.5% increase every year we end up paying back R127 825 even finishing with a 11.5% rate,thats less payback than being fixed at 10.5%
 
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