By TKay Nthebe
A question many clients have been asking following the Central Bank of Lesotho (CBL) announced a 75-basis points interest rate increase, is how this impacts their festive budget. In this week’s article, I explain how the interest rate increase will impact you, focusing on people with debt.
What is the CBL rate?
The CBL rate is the rate at which commercial banks in Lesotho borrow money from CBL to meet their financial needs. The CBL rate (previously 6.25%) also referred to as the base rate, influences the prime lending rate which I discuss next.
What is the Prime lending rate?
The prime lending rate is the rate at which commercial banks lend (from a borrower’s perspective) money to their best customers who need credit to buy homes and cars or to bridge living expenses with overdrafts or credit cards. The prime lending rate (previously 9.75%) is the CBL rate plus 350 points (3.5%) per annum – 6.25% + 3.5% = 9.75% as shown in Table 1 below.
Table 1: Interest rates
| Previous interest rate | Increase (75-basis points) | New interest rate | |
| CBL Rate | 6.25% | 0.75% | 7% |
| Prime lending rate | 9.75% | 0.75% | 10.50% |
Depending on the client’s credit score, account conduct, type of loan facility and risk profile, commercial banks can add a margin above the prime lending rate ranging from 1% to 10% for example.
How does the interest rate hike impact my festive budget?
Take Mphotleng for example who is thinking of taking a loan of LSL250 000 to start her building project. She wants to pay the loan over 72 months (6 years) and her bank offers a variable interest rate of prime plus 5% i.e.15.50% (refer to Table 1 above). If Mphotleng continues with the loan application this December, how much more would she pay?
Table 2: Mphotleng’s loan calculation
| Before the interest rate increase | After the interest rate increase | |
| Mphotleng’s loan amount | LSL250 000 | LSL250 000 |
| Loan repayment period | 72 months | 72 months |
| Interest on the loan (Prime + 5%) | 14.75% | 15.50% |
| Monthly instalment | LSL5 252.37 | LSL5,354.37 |
Looking at Table 2 above, if Mphotleng continues with the loan application following the 75-basis point interest rate increase, she will pay LSL102 more month-on-month on the loan. Should there be another interest rate hike, Mphotleng’s monthly instalment will increase again, putting more financial strain on her budget. If not budgeted for, this will negatively impact her festive budget, while still taking care of the high cost of living following the increase of 7.8% in electricity.
As discussed in the article ‘Be money savvy this festive season,’ consumers should avoid taking new debts or increasing existing loans, because of the high cost of debt, leading to higher loan instalments during interest rate hikes.
Remember that not all debt is bad. I do, however, encourage consumers to review the new loan instalments, pay off high interest loans, make changes where necessary and track their spending during the festive season. If unsure, please speak to your banker. Likhomo!
