How the interest rate on your loan is calculated

Living costs are rising at a rapid rate and so too the cost of borrowing money. When applying for a new loan, it’s important to make an informed decision by considering factors that influence the interest rate offered, and you could end up saving a handsome amount throughout the life of the loan. We ask Deen Govender from Absa Vehicle and Asset Finance more about this.


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What determines the credit assessment and interest rate?


  • At Absa, we employ a risk-based pricing approach, where customer risk, finance structure and asset characteristics are considered on a deal-by-deal basis.
  • Therefore, a credit assessment and interest rate are determined by:
    • A customer’s income and the sustainability of this income in order to ascertain and ensure affordability,
    • Their credit score and credit history.  In other words, the manner in which previous credit obligations have been managed,
    • Depending on the loan, the type and quality of the asset, vehicle or property,
    • The channel used to buy the vehicle,
    • The type of interest rate you select when applying for a loan.  In other words, whether it is fixed or linked to the prime lending rate.

The choice between a fixed and a variable rate depends on whether a customer is willing to allow market forces to affect their monthly instalments. Generally, the fixed rate option will give one the comfort of an instalment amount that doesn’t change.  However, this certainty comes at a cost because the interest rate is typically higher than the variable interest rate which will increase or decrease in line with the prime lending rate.

Therefore, a customer needs to consider the benefit of the fixed instalment versus the variable instalment and possible fluctuation that may occur.

Which factors will contribute to having a more favourable outcome on your application for a vehicle finance loan?


  • A vehicle with a lower age is less risky for the bank to finance because of the higher value and better warranty, leaving you to focus mostly on maintenance rather than repairs. New vehicles may come at a higher price, but interest rates may be lower because of ongoing car dealership specials and promotions.
  • Paying an upfront deposit on the vehicle and borrowing less money. This saves you in the long run as the interest charged on the loan is lower.
  • Not taking a large balloon amount or not taking one at all. It cannot be stressed enough that you need to prepare for this, or you will find yourself making other arrangements such as taking out a personal loan to pay off the balloon amount at the end of the contract term.
  • Having an existing primary banking relationship with Absa. This makes it easier to assess the recent activity on your account and other credit products.
  • Having a higher credit score and a longer credit history.

How can you increase your credit score?


  • You can work towards increasing your credit score by following steps that include:
    • Paying loans on time and setting up debit orders for payments,
    • Paying off existing loans, closing any unnecessary accounts and keeping credit use low,
    • Reviewing your credit score regularly, rectifying mistakes, and identifying any fraudulent activities early.

If you are in the market for buying a car, try our vehicle finance calculator.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.