There are numerous articles and press coverage of the interest rate cuts that have happened over the recent months. It’s likely that you’ve already been benefiting them – both your business and personal debt servicing costs will have been cut as a result. Even healthy businesses operate with a reasonably high debt burden and servicing this debt costs money.
Small changes in the interest rate can translate to your debt servicing costs rising or falling by large amounts. Using these current dips in the interest rate is an excellent time to make a dent in the high debt your business has accrued.
Simply maintaining your business debt by paying the minimum amounts due each month will barely make a dent in the principle amount owing, and your debt ratio. Since most banks, in response to the COVID-19 pandemic, have dropped the minimum monthly payment amounts, it is likely that even in a best-case scenario you are only paying interest and your principle debt amount is not changing. Although paying the minimum is very easy to service, it is actually extending the life of your credit agreement.
South Africa’s prime interest rate has dropped drastically over the last few months, and currently businesses are working with a prime rate of 7.25%. This means the cost of servicing all debt has dropped, and your business’ costs for servicing this debt has dropped quite dramatically too. Consider using this lower interest rate to make some headway on your principle loan amounts.
The differences that can be realised by even small increases in your monthly contributions, particularly while the interest rate is low, can make a big difference in servicing your credit. Now would be the perfect time to funnel some extra cash into your business debt payments. Even if only for a few months, it will affect the overall cost of the loan and will save your business money over the long term.
The interest rate may provide many business owners a spite of relief, but even in these very challenging times, it would be best to keep up the payments of the pre-interest rate cut in order to reap the long-term rewards. By keeping up with your original payments on your debt, you can significantly reduce the total interest you pay and shorten the loan repayment term.
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