Banks are often nicest to those who need them least. But there are ways to get into their good books.
It`s not fair but that`s the way it is: it`s easier and cheaper to borrow if you`re rich. Or, to put it another way, it`s often the people who need them least who get the best deals from the banks.
Whether you are buying on a credit card, using your overdraft to pay the school fees or taking out a home loan, sooner or later, you`ll bump up against the harsh reality. The richer you are, the more cheaply you can borrow.
On credit cards, a bigger credit limit usually goes with a lower interest rate. Most banks charge higher interest rates on the bottom-of-the-range card and lower interest rates on their top credit cards. As for overdrafts, the much-quoted prime rate (14,5 percent at the moment) applies to the bank`s best clients. If you`re just anyone, you`re likely to pay a higher rate. And, on home loans, you can find yourself paying up to two percentage points more than the basic home loan rate if the bank does not see you as a good credit risk.
For instance, Absa, says Nigel Walker of the Personal Market division, starts negotiating at the basic mortgage bond rate and settles on a rate which ranges between a maximum of the basic rate plus two percent and the basic rate minus two percent. ``Both ends of this scale are the exception rather than the norm,`` he says.
The rate you get depends both on the risk the bank must carry with the loan and on the size of the loan.
``A low-risk, high-value transaction would attract a high concession, whereas a high risk, low value transaction would attract a higher rate,``
says Walker.
``The income level is a factor in this equation but this does not imply that the lower income client is a higher risk.`` On fixed home loan rates, too, many banks offer a lower rate to bigger borrowers. For instance, Standard`s fixed rates on new loans over a year are 14,65 percent on a loan of less than R150 000; but 14,4 percent on R150 000 to R400 000; and 14,15 percent on loans over R400 000. And, in many cases, the best deals of all are reserved for what the banks
call ``high net worth individuals``.
At Origin, for instance, you can get an enticing interest rate by consolidating all your debt, including your home loan, into one package - provided you have a combined household income of more than R240 000 a year and assets to support a R400 000 loan. To use Investec`s private banking facility, you must earn R400 000 a year or more. So, is there any way you can swim with the big fish even if you`re a little fish?
Yes, say the banks. Everything depends on your credit record and on your ability to negotiate. ``The most important thing you can do,`` says Standard Bank`s Ed Dibden, ``is to build up a good credit history. If you have conducted your account well, the chances are when you need credit the bank will give it to you, at a favourable interest rate``. Unauthorised overdrafts, or bounced cheques, on the other hand, are a no-no.
Increasingly, says Dibden, the banks are moving to ``score`` accounts and you can expect to be charged less in interest if your account ``scores`` well
because you`ve managed it according to the rules. So, it`s worth your while to stick to your overdraft limit. If you`ve reached the limit and you urgently need more credit, go and talk to your bank. Don`t just write out a cheque and close your eyes and hope all goes well. Even if the bank doesn`t bounce your cheque, this will reflect negatively on your record. In fact, says Dibden, don`t write out cheques at all, if you can avoid it.
Rather use electronic transfers or the internet to pay your bills. That way you can cut down on service fees. And if you can afford to keep a minimum balance in your current account, you can often save on banking charges. Banks which offer this option are Absa, Standard and FNB and the minimum you have to keep in your account is R1 750 at Absa and R2 000 at Standard and FNB.
Get the right loan
Managing your account also means using the appropriate form of credit. ``The bank must correlate risk with reward,`` says Dibden. ``If you ask me to
lend you R10 000 for a week, expect to pay a high rate of interest because I`ll be taking a risk on R10 000 and only be making a rand or two profit.`` So make sure you know the different options open to you - revolving credit, home loans, hire purchase, overdraft - and ask the bank for advice on which is the most appropriate for your purposes. Revolving credit is usually more
expensive than overdrafts because overdrafts can be called in by the bank at any time.
Interest rates on credit cards are higher than on overdrafts and interest on overdrafts is higher than on home loans. But be wary of using your home loan to finance short-term purchases to save on interest payments. Tempting though it may be to use your home loan to buy a new car, it`s not usually a good idea, says Dibden - unless you put the money you would have spent on car instalments back into the home loan.
That way, you can finance the car with the lower interest rate you pay on your home loan, without increasing the size of your bond for long. ``Your home loan is the best place to park temporary money,`` says Dibden. ``No one who has a home loan should have a savings account. But it`s not usually a good idea to dip into your home loan to pay your current expenditure.
``Why use capital you have built up in your bond to finance your groceries over 20 years? If your back is to the wall, you might have to take money out of your bond. But only if not doing so puts you even deeper into debt.``
Negotiate
You should always - especially at the beginning of your relationship with the bank - negotiate a better interest rate or lower charges, says Absa`s Nigel Walker.
``Ask for the best rate and shop round.``
He suggests you compile a complete and clear picture of your personal financial situation, your income, your expenditure patterns, your assets and your debts, as a basis for negotiation. Even if you`re a fairly small client, if you have a good credit record you may be able to negotiate better terms for yourself.
The bank will help you put together the information.
You may not have ``high net worth`` status, but you do have some clout. The bank would rather have your business than lose you to a competitor; so, when you buy a house or open a cheque account, contact all the banks and find out which will offer you the best deal.
Remember, you don`t have to keep all your accounts in one place, though many banks like you to. There`s nothing to stop you having your home loan at one bank, your cheque book at another and your credit card at a third, if that`s what suits you best. If the bank wants all your accounts, suggest that they offer you an incentive in the form of better interest rates.
And, even if you`ve been with the same bank for years, consider moving your accounts if you can get a sweeter deal elsewhere - though you must weigh up
the advantages of a better interest rate against the disadvantages of having to build up a relationship from scratch with the staff in your new bank. Of course, the best strategy of all is to get out of debt as fast as
possible. Pay your credit card off in full each month (don`t just pay the minimum instalment) to get a month`s free credit. And if you can afford to
make even a small extra payment into your home loan each month, you`ll save more than you thought possible in interest bills - and cut years off the
term of your loan.
An example: on a R200 000 home loan over 20 years, you will pay R2 560 a month while the home loan rate is 14,5 percent a year. But if you add just R200 extra to your repayment each month, you can reduce the term of your loan by five-and-a-half years and knock more than R135 000 off your total interest bill. Think of it as getting your own back on the banks.
Do`s and don`ts
* Don`t make the mistake of thinking a couple of percentage points here or there don`t matter: they do. A half a percentage point shaved off the interest rate on your home loan, over 20 years, can save you thousands in interest;
* Don`t lie to your bank about your assets or your income; sooner or later, you`ll be asked for proof;
* Don`t try to fool your bank by pretending you can get a better rate elsewhere when you can`t. The banks know more than you do about the interest rates their competitors are offering;
* Do find out about any corporate advantages you can get (for instance, your employer may have negotiated a home loan interest rate for employees at a particular bank) and then ask the bank to give you an even better deal;
* Do negotiate with your bank;
* Do shop around for the best deal in town.