What Is an Interest Rate and How Does It Affect Your Money

Interest rates. You’ve probably heard the term on the news, in a WhatsApp business group, or from your bank when asking about a loan. But what does an interest rate actually mean when you’re running a business day to day?

It matters because interest affects the cost of borrowing money. If you run a spaza shop in Gugulethu, a salon in Soweto, or a coffee stand in Durban, a change in interest rates can affect loan repayments, stock decisions and cash flow.

This guide breaks down what interest is, what an interest rate is, the difference between the two, and why interest rates matter for small businesses in South Africa.

Firstly, what is interest?

Interest is the extra money you pay when you borrow money, or the extra money you earn when you save or invest money. If you borrow R1 000 and pay back more than R1 000, the extra amount is interest. If you keep money in a savings account and the bank adds money to it, that extra amount is also interest.

An interest rate is the percentage used to work out that interest. So, interest is the rand amount, while the interest rate is the percentage used to calculate it.

Understanding what an interest rate is

An interest rate is the percentage a lender charges when you borrow money, or the percentage a bank may pay when you save money. It is usually shown as an annual percentage.

Think of it this way. Interest is the actual money added to the loan or savings balance. The interest rate is the percentage used to calculate that amount. For example, if you borrow R10 000 at 10% interest for one year, the interest would be R1 000 before any fees or repayment terms are included. That means you would repay more than the amount you borrowed.

• If you take out a loan from a bank, you’re charged interest on the money you’ve borrowed, based on the bank’s lending terms.
• If you stash your money in a savings account, the bank offers you a rate of return for leaving your money with them.

The Reserve Bank tweaks these rates to try and control inflation. So, if prices are going up too quickly, they might raise interest rates to slow things down. And when the economy needs a bit of a push, they lower them to make borrowing cheaper.

A simple way to think about interest is rent on borrowed money. If you borrow from the bank, interest is the extra cost you pay for using that money.

Here are some other useful terms related to the interest rate and how it works in South Africa:

Inflation

Inflation is that sneaky thing that makes everything from airtime to avocados more expensive over time. It’s the rise in the average price of goods and services, which means the same R100 you use today doesn’t stretch as far as it did five years ago.

And it’s caused by a range of things. Anything from fuel hikes to load shedding or even global problems that affect the rand. Inflation is measured as a yearly percentage and when it’s high, it impacts how much your customers are willing (or able) to spend.

The repo rate:

The repurchase or repo rate is the benchmark that influences how lending rates are set across the banking system. Think of it as the “wholesale” interest rate.

And why is this important? Because when the SARB adjusts the repo rate, it’s like flipping a switch that changes what banks charge you and I when we borrow money. So, when the repo rate goes up, banks usually increase their interest rates too, which then affects your loan repayments.

Let’s put it in real terms:

Say you’re running a thriving hair salon and want to upgrade your dryers and chairs. You take out a R50 000 loan.When borrowing costs are high, compound interest can mean you end up paying back far more over time, which can eat into your profit. But if rates are low, you might find that the repayments are easier to manage, freeing you up to reinvest in your business or even hire someone new.

If we look at it in another way, higher interest rates might have you asking whether or not you can afford to upgrade to a state-of-the-art stove in your restaurant? Or whether you’ll be able to run your service until you’re making a profit if it’s going to take you two more years to pay back your business loan?

These are all major factors to break down and think about when you’re trying to build a successful business.

What is prime interest? And how does it impact business loans?

Now let’s talk about prime.The prime interest rate is the base lending rate banks use when pricing loans for customers. It’s directly linked to the repo rate. So, when the repo rate goes up or down, the prime rate usually does as well.

Think of it like this:

The repo rate is what banks pay to borrow from the SARB. The prime rate is what you pay to borrow from the banks. And the gap between the two? That’s the bank’s markup. It's sort of like their “service fee” for lending you money.

So, what actually happens when interest rates rise or fall?

Let’s say SARB increases the repo rate. That kicks off a bit of a domino effect:

• Your business loan repayments will likely go up.
• Car finance? That’ll cost more too.
• Bond repayments? Higher.

Even your credit card interest rate could climb. On the flip side, if the repo rate drops, you could benefit from lower interest on all those things. This could mean more cash flow to reinvest in your business or cover a tight month.

The SARB’s Monetary Policy Committee meets six times a year to set the repo rate, so it helps to keep an eye on updates if you’re planning to borrow money or review repayments. Plan strategically and be adaptable because when you stay on top of your game, you’ll be able to roll with all the punches of entrepreneurship.

What is the difference between interest and interest rate?

Interest is the amount of money charged or earned. The interest rate is the percentage used to calculate that amount.

If your loan statement says you paid R500 in interest, that is the rand amount. If the loan has an annual interest rate of 12%, that is the percentage used to work out what you owe.

A simple way to remember it: interest is the money, interest rate is the percentage.

Why interest rates matter for you and your SME

Interest rates change over time, so it is always worth checking the latest figures from the South African Reserve Bank before making a funding or repayment decision. But you might not always get the prime rate when applying for a business loan. Banks often add a few extra percentage points based on your:

• Credit score
• Business risk profile
• Financial history

So, if your risk profile is a bit spicy, your interest rate might be prime + 2%, or even more. Higher borrowing costs, across different types of interest charged on loans and credit, can become an obstacle to growing your business.

This is because interest rates affect:

• How you pay your debt: When interest rates go up, so does the cost of paying back your business loans. This can seriously squeeze your cash flow and have a domino effect on other operations like paying suppliers and making your payroll.
• How much it costs to borrow money: Most small businesses need a little credit to grow or expand. But getting funding while interest rates are high could eat into your profit margins and put a damper on your big plans if you have to make bigger loan repayments. On the bright side, lower rates could mean cheaper loans and more money in your pocket.
• Exchange rates and import taxes: Sometimes, lower interest rates weaken our currency.The result? Imported goods become pricier. If your business relies on products from overseas, you might see your costs go up which might force you to increase your own prices to stay competitive.
• How consumers spend: Interest rates directly impact how people spend their money. When rates are low, borrowing is cheaper and makes it easier for consumers to open their wallets and spend more. That means more sales for you! But when rates are high, people switch to saving more, which really slows down consumer spending.

In the end, a healthy economy is one where customers can happily spend and small businesses can thrive and grow. Understanding interest rates could help you navigate the turbulent seas of ownership and keep your business sailing smoothly.

Stay rate-savvy

Interest rates can change, and you won’t always control when they move. What you can control is how carefully you borrow, how often you check your repayments, and how much room you leave in your cash flow.

Before taking on credit, look at the full repayment amount, not only the monthly instalment. If the rate is variable, ask how your repayment could change if interest rates rise. It’s also worth checking the latest figures from the South African Reserve Bank before making a big borrowing decision.

Tools like iK Accounting and iK Dashboard can help you keep a clearer view of your money, but the main habit is simple: know what you owe, know what it costs, and don’t let interest quietly eat into your profit.

FAQs about interest and interest rates

What is interest?

Interest is the extra money you pay when you borrow money, or the extra money you earn when you save or invest money. For a loan, it is the cost of borrowing. For savings, it is the return you earn for keeping money with a bank or financial provider.

What is an interest rate?

An interest rate is the percentage used to calculate how much interest is charged or earned. It is usually shown as an annual percentage. A higher interest rate usually means borrowing costs more, while a lower interest rate usually means borrowing costs less.

What is the difference between interest and interest rate?

Interest is the rand amount charged or earned. The interest rate is the percentage used to calculate that amount. For example, R500 paid on a loan is interest. A 12% annual rate is the interest rate used to work out the cost.

Why do interest rates matter for small businesses?

Interest rates matter because they affect the cost of borrowing money. When rates are higher, business loans, vehicle finance, credit cards and overdrafts can cost more. That can put pressure on cash flow, especially for small businesses already managing stock, rent, staff and supplier costs.

Who sets interest rates in South Africa?

The South African Reserve Bank sets the repo rate, which influences borrowing costs in the wider economy. Banks then use rates like the prime lending rate and their own risk assessment when pricing loans for customers and businesses.