How Your Bank Marks Up Money Borrowed From The Government & Loans It Out To You

At Wise About Life we are all about making better money decisions. Part of being able to make smarter financial decisions comes with understanding how money flows and works in a society. In this article we are going to touch on how your bank borrows money from the Reserve Bank (the Government) and then makes it available to you in the way of a loan.

Think of the Reserve Bank as the ultimate private banker, holding all the chips at the poker table.

If you want a seat at the table, you need to get your hands on some chips. The additional players at the table are SA banks and the chips are billions of Rand that get packaged up as finance solutions for South Africans.

All the banks in South Africa (like the ones you and I have dealings with on a day-to-day basis) need to call on this private banker to lend money if they are short of cash.

So, banks that are lending money out to us are borrowing money form the main private banker called the Reserve Bank (Government)

Easy enough to understand?

The rate at which the Reserve Bank lends money to private banks is knows as the Repo Rate. The Repo Rate is determined by the Reserve Bank at a Monetary Policy Committee (MPC) meeting.

At the time of writing this post, the Repo Rate was 6,50%.

By raising or lowering the Repo Rate, the Reserve Bank makes it more or less expensive for banks to borrow money. That in turn has a knock-on effect on what banks end up charging consumers like us on our finance agreements (personal loans, bonds and vehicle agreements).

How does your bank make money?

Well, if they are borrowing money from the Reserve Bank at 6,50% and loaning it out to consumers at 10% then the difference is how they make their cut.

The Prime Lending Rate is the rate at which banks loan money to consumers.

If you have every needed a loan from a bank, they will always provide you with an interest rate quote prior to you accepting the offer.

If you are deemed to be a good risk (the bank doesn’t think you will default on your repayments) they might offer you “Prime”. If your application is deemed to be a little riskier, perhaps that might offer you “Prime Plus”.

All that’s happening is that your bank is offering you money they have borrowed from the Government, with a little something for themselves added on top.

The Repo Rate and Prime Lending Rate are the two take away terms from this blog post.

Until next time

The Wise About Life team

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