Want the best interest rate?

25/07/2018

Want the best interest rate? Make sure you’re comparing apples with apples

When shopping around for the best interest rate, don’t be fooled by terms such as “market-leading”, “best in SA”, “highest”. Rather do some investigations, find out how interest works and in the end, make sure you’re comparing apples with apples.

These are the terms you need to know:

The Annual Compounding Interest rate is the interest you earn as a depositor if you leave your deposit with the bank for a full year and only draw the interest at the end of that year. If you choose NOT to be paid your interest every year and opt to rather have it paid out on the maturity of the product (for example, after five years), this is called the Expiry rate.

This example might make it easier to understand:

We currently offer a 10.5% rate for a fixed term deposit of 5 years. That is the Annual Compounding rate that you will earn if you decide to have interest paid out each year.

Simply put, if you were to invest R100 000 in this 5-year fixed term product on 1 July 2018, the bank would pay you R10 500 in interest on 30 June 2019, and again on 30 June 2020, 30 June 2021, and 30 June 2022, and return the principle, together with the 5th year’s interest on 30 June 2023, paying out a total of R 110 500 on that date. In total you earn and are paid out interest of R52 500 (5 x R10 500).

Let’s now look at what is termed the “Expiry Rate”. When you choose NOT to be paid your interest earned every year, the bank re-invests these funds and you start earning interest on that money, i.e. – interest on interest. This is known as the Annual Compounding interest rate. Under this scenario you would earn an additional amount of over R12 000 resulting in total interest earned of over R64 000 at an “Expiry rate” of 12.95%.  That’s the power of compounding or earning interest on interest.

So to simplify this is what you really need to know:

  • Always compare the annual interest rates amongst service providers, and not the Expiry rate interest rate. If you are not sure, phone and ask them or visit your local branch.
  • Also remember a Monthly Compounding rate is less than an Annual Compounding rate. It is always better to leave your interest in the bank and let it accumulate for as long as possible to receive the greatest return.
  • Invest with a reputable service provider.
  • If possible don't withdraw your interest. Reinvest your interest to get the most money back – to earn interest on interest, i.e. “compound interest”
  • Always check if you will pay penalties if you withdraw your deposit early and/or what you can withdraw when.
  • Invest for as long a period as possible to receive maximum benefit  
  • If you want the full impact of compounding you need to ensure you are comparing the same Expiry Rates, also sometime referred to as maturity rates, for the same maturities across all banks.

Remember to shop around and make the necessary comparisons. Don’t be afraid to ask questions and make sure you understand what interest you will be earning. You may find at the end of the day you could be comparing apples with oranges, rather compare apples with apples and make an informed decision.

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About African Bank

Our mission is to be a successful Retail Bank offering a wide range of products and services to the consumers of South Africa. The people who work for African Bank represent the diverse population of South Africa; therefore we are a reflection of you, of all South Africans. We seek to provide value - more than our consumers expect of us. We promise to live our purpose 'humanity through banking' in all that we do and we are confident that we can, because 'We are You'.