Comparing Costs: Taking a New Loan vs Refinancing
With interest rates varying across banks, the local economy recovering, and the rising cost of living, many people wonder: should they take out a new loan or refinance an existing loan?
This decision directly impacts the total cost of credit, financial flexibility, and personal credit health, making it crucial to understand the differences, advantages, and disadvantages of each option.
The Current Credit Landscape in South Africa
The economic landscape in South Africa is complex. Despite a gradual post-pandemic recovery, rising prices for basic goods and increasing interest rates are putting pressure on consumers.
According to the South African Reserve Bank (SARB), the prime interest rate has fluctuated between 7% and 9% over the past two years, directly affecting financing costs for mortgages and personal loans.
Additionally, consumer credit has grown in importance. More households rely on credit cards, personal loans, and mortgage financing to manage unexpected expenses or plan major purchases.
What is a new loan?
A new loan involves obtaining credit from a financial institution—whether a traditional bank, credit union, or fintech—to meet a specific need.
In practice, a new loan can be:
- Mortgage: for purchasing or building a home.
- Personal: for consumption, renovations, or education.
- Auto: for purchasing vehicles.
Advantages of a New Loan:
- Flexibility of terms and amounts: allows borrowers to choose conditions suited to their current financial situation.
- Potential for better rates: if the borrower’s credit score has improved since the previous loan.
- Access to new features: some institutions offer digital solutions, cashback programs, or penalty-free early payments.
Disadvantages:
- Approval depends on credit history and current income.
- May involve upfront costs, such as origination fees and credit assessment.
- Does not automatically reduce existing debt unless used to consolidate multiple loans.
What is refinancing?
Refinancing involves replacing an existing loan with a new contract, usually with lower interest rates, different terms, or adjusted repayment conditions.
In South Africa, refinancing is common for:
- Residential mortgages: especially when banks offer more competitive terms.
- High-cost personal loans: to reduce monthly interest payments or consolidate multiple debts into a single payment.
Advantages of Refinancing:
- Lower monthly payment: extending the term or reducing the interest rate decreases installment amounts.
- Total interest savings: refinancing at lower rates can save a significant amount over time.
- Debt consolidation: allows multiple loans or credit cards to be combined into a single contract, simplifying financial management.
Disadvantages:
- May involve additional costs, such as evaluation fees, origination fees, or registration charges.
- Extending the loan term can result in paying more interest overall.
- Not always available: financial institutions may restrict refinancing based on risk profile or loan age.
Criteria for Deciding Between a New Loan and Refinancing
Choosing the best option depends on carefully analyzing your current financial situation, goals, and market conditions. Key criteria include:
- Current interest rate: if your existing loan has a significantly higher rate than the market average, refinancing may be advantageous.
- Outstanding balance: loans with low balances may not justify refinancing costs, making a new loan more attractive.
- Terms and cash flow: extending terms lowers monthly installments but increases total cost; shortening terms raises monthly payments but reduces interest paid.
- Financial goals: if the goal is debt consolidation or freeing up capital, refinancing may be more efficient; if the goal is funding a new purchase, a new loan is preferable.
Risks and Precautions
Even with clear advantages, there are risks to consider:
- Hidden fees and charges: refinancing may involve registration, property evaluation, or origination fees that need to be accounted for.
- Additional debt: taking out new loans can increase overall debt if financial discipline is not maintained.
- Credit impact: multiple loan or refinancing applications can temporarily affect credit scores.
Therefore, it is recommended to use simulators, compare offers from multiple institutions, and consult financial experts if possible before making a decision.
Personal Credit Trends in South Africa
Some trends for 2025 that influence the decision between a new loan and refinancing include:
- Full digitalization of the credit process: fast analysis, electronic signing, and automatic disbursement.
- Hybrid credit packages: combinations of personal loans and refinancing of existing debts.
- AI-driven personalization: algorithms adjust terms, rates, and limits based on the customer’s financial behavior.
- Integrated financial education: platforms provide tips to improve financial habits and reduce the risk of future debt.
