Personal loan rates on new loans and on existing variable rate loans may increase in response to the RBA cash rate rise depending on the lender and type of loan. The Reserve Bank (RBA) the official cash rate on 3 February by 0.25% to 3.85%. The decision to increase the cash rate was made on the back of a rise in inflation which RBA Governor Michele Bullock said is now above the RBA’s target and will likely stay above that target for a while.
Banks and lenders can choose whether or not to follow the RBA and reprice their lending products. What credit products and what rates change after an RBA decision is totally up to the lender. But it is typical for lenders to increase variable rate loans and fixed rate credit products may also see a rate change. This may apply across the portfolio of secured and unsecured credit products or only on a selection of loans.
Why RBA Decisions Cause Personal Loan Rates to Rise
The RBA sets Australia’s official cash rate. This is not the interest rate that borrowers will be offered on personal loans or other types of credit products. The cash rate is the overnight lending rate for loans between banks. As this is an interest rate charged to lenders, the cash rate reflects the funding costs of the lenders.
Lenders set the rate they will charge on different loans based on a number of factors. These include the cash rate as a base, their own costs of acquiring funding, operational costs, risk assessment of the specific lending market, and their appetite or interest in lending in a particular market. Those lenders that are particularly interested in being active in a certain market typically offer the most competitive rates.
Lenders are not compelled to make rate changes when the RBA changes the cash rate. But most will. This is seen within days in the home loan market where variable rate loans are changed, usually by the amount of the RBA change. This is referred to as ‘passing on’ the increase or cut to customers.
In other markets such as motor vehicles, recreational goods, and general-purpose personal loans, the decision around changing their current advertised rate is with the lender. This leads to a situation where there can be variations in rates across the market.
Personal Loan Rates – Existing Finance
Not all personal loan rates will be increased following an RBA cash rate rise. Borrowers with existing loans that have a fixed rate, will not see their rate or repayments change. Fixed rate loans include Secured Loans for cars, boats, caravans, motorbikes and other goods that can be used as loan collateral.
Borrowers with existing loans that have a variable interest rate can usually expect to have a rate increase. A variable interest rate is subject to market fluctuations – both cuts and increases. When the rate changes so does the monthly payment. Variable rates apply to some Unsecured Personal Loans that can be used for a wide range of expenses such as medical, travel, weddings, education and household goods. When a variable rate loan changes, lenders will advise their customers of the upcoming change.
Where a borrower finds an increase to their variable rate loan makes the repayments an unworkable proposition, they may consider refinancing by seeking a lower rate from another lender. Our brokers can assist borrowers that are seeking a lower rate on an existing loan.
Variations with New Personal Loan Rates
When applying for new loans, applicants will notice variations across the lending market. While there are rate variations with lenders offering personal loans, there will also be variations in the rate that individuals are offered. Lenders assess each application to determine the rate they will offer to that individual for the specific purpose of the finance. The interest rate is essentially the lender’s assessment of the risk of lending to that individual.
The rate offer will primarily depend on a amount being borrowed compared with the value of the goods, the financial position and credit score of the applicant and what collateral is provided for the loan. As unsecured loans do not require collateral, the rate is always higher than for a secured loan.
Lenders will advertise their best rate for applicants that have a good credit score for a loan on new goods. A comparison rate is also displayed for consumer loans. This is the rate on a particular loan example when the advertised rate is applied, and some lender fees are included.
Rates vary with the types of loans – secured and unsecured and may vary for different categories of goods such as motor vehicles compared with recreational goods. Some lenders have maximum limits on how much they will loan on their different credit products. Individuals will be advised of their borrowing capacity – how much they can borrow, when they apply for the loan.
Comparing Personal Loan Rates
Individuals seeking new loans can compare our current rates to plan their purchase and finance. We have the tech to stay across lender rate changes and source the most competitive rates on the market. To assist loan-seekers find their best rate offer, our broker services are readily available to all eligible applicants. Contact can be made online or by phone.
For the most competitive personal loan rates, connect with Jade Finance online or by phone.
DISCLAIMER: NO LIABILITY IS ACCEPTED IF ERRORS OR MISREPRESENTATIONS ARE FOUND IN THIS ARTICLE. THE ARTICLE IS PREPARED AND PRESENTED FOR GENERAL INFORMATIVE PURPOSES AND IS NOT INTENDED TO BE THE SOLE SOURCE OF INFORMATION FOR MAKING FINANCIAL DECISIONS. THOSE REQUIRING GUIDANCE AND ADVICE SHOULD CONSULT A FINANCIAL ADVISOR.
