The Bank of Zambia’s decision to cut the Monetary Policy Rate to 10.75 percent has created a new question for thousands of Zambians who are currently paying bank loans: will their monthly repayments also come down?
The central bank reduced the Monetary Policy Rate by 2.5 percentage points from 13.25 percent, with Governor Denny Kalyalya saying the decision was supported by lower inflation and an improved economic outlook. Inflation fell to 6.1 percent in September, while the Kwacha appreciated by 8.3 percent during the third quarter.
For borrowers, however, the most important thing to understand is that a reduction in the Bank of Zambia’s policy rate does not automatically mean every existing loan will immediately become cheaper.
The first thing you should check is your loan agreement.
Look at the interest-rate section of your contract and establish whether your loan carries a fixed or variable interest rate. A fixed-rate loan may not change simply because the central bank has reduced its policy rate, while a variable-rate facility may be linked to a benchmark that can change.
The second thing to check is your current interest rate.
If your bank reviews lending rates following the Monetary Policy Rate reduction, you need to know whether the change will apply to your particular loan and from what date.
You should also check your latest loan statement to see how much of your monthly payment is currently going toward interest and how much is reducing the principal amount you borrowed.
This can help you understand the actual effect of any future rate adjustment.
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Another important question is whether your bank has announced changes to its lending rates.
The Bank of Zambia has indicated that the lower policy rate is expected to feed through to other interest rates and support economic activity.
That process, however, depends on how individual financial institutions respond.
Borrowers should therefore avoid assuming that their monthly instalment will automatically fall.
If your bank does reduce the interest rate on your loan, ask for a revised repayment schedule. The new schedule should show the outstanding balance, interest rate, remaining repayment period and the new instalment, where applicable.
It is also worth checking whether a lower interest rate could allow you to finish the loan earlier rather than simply reducing the monthly payment.
For example, if your monthly repayment remains affordable after an interest-rate reduction, you could ask your bank whether additional payments toward the principal are permitted and whether there are any early-settlement charges.
Borrowers should also be careful about taking another loan simply because interest rates may be moving downward.
A lower interest rate can reduce borrowing costs, but taking on additional debt still increases your overall financial obligations.
The Bank of Zambia’s latest decision comes against a backdrop of falling inflation and improved foreign-exchange conditions. The central bank said increased foreign-exchange supply, including significant mining-sector inflows, contributed to the Kwacha’s appreciation during the third quarter.
For ordinary borrowers, the next step is therefore not simply to wait for the bank to make a change.
Check your loan agreement, establish whether your rate is fixed or variable, review your latest statement and contact your bank to find out whether the new policy rate affects your facility.
The interest-rate cut has changed the monetary environment, but what it means for your personal loan will depend on the terms of the loan and how your financial institution passes the change through to customers.
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