Most people compare loans by looking at the monthly instalment. It is the number the advert shows, it is the number that feels manageable, and it is almost the least useful figure in the whole agreement. Two loans with identical instalments can differ by thousands of rand in what you actually hand over.
Here is what makes up the cost of a personal loan in South Africa, and what to compare instead.
The three parts of what you pay
A credit agreement regulated by the National Credit Act typically has three cost components, and a lender must disclose all of them before you sign:
- Interest — the annual rate charged on the outstanding balance. Under the National Credit Act, the maximum rate a lender may charge on unsecured credit is capped by a formula linked to the Reserve Bank's repo rate, so it moves when the repo rate moves.
- An initiation fee — a once-off charge for setting the agreement up. It is regulated, capped, and often added to the loan rather than paid upfront, which means you pay interest on it too.
- A monthly service fee — a small fixed amount charged every month for administering the account. It is also capped by regulation.
The caps change from time to time, so if you want the current figures, the National Credit Regulator publishes them.
Why the instalment misleads you
Stretch a loan over a longer term and the instalment falls. Nothing about the loan got cheaper — you are simply paying for longer, and paying interest for longer.
Take R30 000 at 24% APR:
| Term | Monthly instalment | Total repaid | Cost of credit |
|---|---|---|---|
| 12 months | R2 835 | R34 020 | R4 020 |
| 24 months | R1 586 | R38 065 | R8 065 |
| 48 months | R987 | R47 376 | R17 376 |
The 48-month instalment is a third of the 12-month one. It also costs more than four times as much in interest. Both are legitimate choices — a lower instalment that you can reliably afford beats a higher one that you cannot — but you should make that trade knowingly rather than by accident.
These figures are illustrations at a single rate and exclude the initiation and service fees, which push the real total higher.
The number to compare
Ask for two figures on every offer:
- The APR, which folds the interest and the compulsory fees into one annualised percentage. It is the only figure that lets you compare two offers on the same footing.
- The total amount repayable, which is what actually leaves your account over the life of the loan.
If a lender will not put both in front of you before you sign, that itself is information.
Fixed versus linked rates
A fixed rate stays where it is for the whole term, so your instalment is predictable. A linked rate moves with the repo rate — cheaper if rates fall, more expensive if they rise. For a short personal loan the difference is usually modest. For a long one it is not, and predictability has real value if your budget is tight.
What actually reduces the cost
- Borrow only what you need. Obvious, routinely ignored. Rounding R23 000 up to R30 000 “just in case” costs real money.
- Take the shortest term you can genuinely afford. Not the shortest you can imagine affording in a good month.
- Check whether early settlement is penalised. Under the National Credit Act you are entitled to settle early, and paying a loan off ahead of schedule saves the remaining interest.
- Look at what is bundled in. Credit life insurance is often compulsory and is part of what you pay. You are generally entitled to substitute your own policy if it provides equivalent cover.
The affordability rule cuts both ways
Lenders are legally required to assess whether you can afford the repayments, using your income and your existing commitments. That obligation is there to protect you, and a decline on affordability grounds is not a judgement of your character. It usually means the instalment does not fit the money left after your existing obligations — which is worth knowing before you commit, not after.