Interest Rate cut – Path to becoming Debt Free
By Emmanuel Allottey
COVID-19 has buckled economies across the world. Governments are scrambling to implement measures to mitigate the disruption to their economies. Central banks have reduced Interest rates with the intention of stimulating economic activity by making it easier for businesses to invest and consumers to spend and borrow. The interest rate cuts provide an opportunity to reduce the debt burden and carve a path to financial freedom.
Lack of access to finance remains one of the largest contributors to poverty in Africa. Majority of Africans do not have formal bank accounts, or incomes that are stable enough to borrow from Financial Institutions. Those who are privileged to borrow from Financial Institutions struggle with high levels of debt and are facing a bleak future of never-ending debt repayments. Financial institutions now offer unsecured loans with repayment period of up to 84 months emphasizing the convenience and affordability of longer repayment tenures to customers.
Government imposed lockdowns and movement restrictions as a result of COVID-19 has led to businesses having to introduce cost reduction initiatives such as pay cuts, reduced working hours, unpaid leave, suspension of contracts and possible retrenchment. The reality of the possibility of loss of income increases the need to identify actions to reduce debt burden and become financial free.
Interest rate cut benefits are passed on to individuals by Financial Institutions in 2 ways: reduction in monthly repayments or a reduction in the tenure of the loan. The longer the loan tenure the more interest to be paid. Repayment of a loan for eight years instead of for three years means you will be owing more interest due to the extra five years. Although the monthly repayments are lower with long tenure loans, cumulatively over the tenure of the loan you end up paying more interest which makes the loan more expensive. A short tenure loan means that you will pay less in terms of overall interest.
While long tenure loans help ensure your monthly repayments are affordable it also takes longer to become debt-free. Becoming debt-free is a major financial goal for many people, and it is an important first step to financial freedom. The right choice for your loan repayment tenure will vary depending on your financial situation, including how much flexibility you have in your budget and what your money goals are. Contact your accredited Financial planner to explore your options.