The period of record low interest rates during the peak of the pandemic in 2020 and 2021 represented significantly attractive conditions for both businesses and private buyers to make major acquisitions with finance. But the situation has changed and based on the recent ABS release of employment and inflation results, interest rates are set to increase further in coming months.
Inflation in particular is soaring in Australia and globally. A situation which has seen the RBA hike the cash rate from that record 0.1% low to 1.35% by July 2022. Another 0.5% rise is expected at the RBA Board’s August meeting. As the RBA lifts rates, lending markets follow and we’ve seen rate rises across motor vehicle finance, marine finance, equipment finance, caravan and motorcycle loans, truck loans in our general business finance facility markets.
Those planning to take on finance will be focussing on interest rates and seeking ways to ensure they achieve the cheapest rate for their particular loan. Just because interest rates are rising across lending markets, paying a higher interest rate on finance does not have to be an inevitable outcome for all borrowers. Those with existing loans and buyers planning to take on finance can consider ways to achieve a cheaper rate and/or protect their loan from future rate rises.
We illustrate this point by addressing common concerns that borrowers may have and posing scenarios around certain loan types and options.
Interest Rates Update
Further rate rises are unfortunately inevitable. The RBA eluded to this in their statements over the past few months and with inflation posing another significant 1.8% rise in the June quarter that pretty much seals the deal.
Cash rate rises by the RBA do take time to have an effect on an economy. It will be some time before inflation starts to fall and prices ease. Treasury’s latest forecast have inflation rising to possibly 7.75% by later this year, falling by the middle of 2023 to around 5.5% but not until the middle of 2024 is inflation expected to be around 2% to 3%. During the record low rate period, inflation was sub 2%.
Impacts for Existing Finance and Loans
The effect of rate rises now and into the future on those with current loans will depend on the type of interest rate and loan conditions. Where a loan (excluding home mortgages) has been established with a fixed interest rate, that rate should be applicable for the entire loan term. This would apply to the majority of finance offered by Jade Finance.
So our fixed rate loan holders should see no change to the interest rate, repayments or other aspects of the loan when rates rise.
If the loan has a variable interest rate, then it can be susceptible to increases in rates and repayments in line with rate rises. Variable rate loans for the purchase of many goods are offered by some lenders. As an example, refer to our chart which compares our Caravan Finance Loans with some other major lenders.
Effects on Pre-Approved Finance
Jumping in to get a pre-approved loan prior to an imminent rate rise may seem like a solution to avoid a higher interest rate loan. We strongly recommend buyers look to pre-approved finance as a way of ensuring they have the finance to proceed with a purchase and to assist with making buying decisions.
But there are a number of issues to consider here. Some lenders will increase their rates in anticipation of RBA decisions. In other words, they act to lift their rates before the RBA announcement. Also, pre-approved finance offers are only valid for a set time period. This may be a month or less. The details will be advised at time of approval.
If the pre-approved loan is not activated within the set time period, it would expire and need to be re-quoted.
Avoiding Higher Interest Rates
Avoiding higher rates can be achieved by addressing a number of aspects of the finance sourcing process. Primarily, utilise the services of a broker-style lender such as Jade Finance. Rates and loan specifications and conditions can vary across the lender market. Taking on the process yourself of researching enough of a particular market to find the cheapest rate can be time-consuming, infuriating at times, and surprisingly can have a negative effect on the credit rating.
In order to receive specific loan quotes to compare, an application may need to be completed and submitted to multiple lenders. These applications are reported to the Credit Reporting Agencies and can be seen as a negative by lenders checking the credit profile. The flow-on may be a higher risk assessment and higher rate loan offer.
When using our services to cover off on many lenders to source the cheapest offer, that process of reporting does not eventuate.
We are accredited with a vast choice of lenders including many that are not available direct to the public. These specialist lenders, many of which are known to be highly negotiable on rates and loan conditions, only operate through industry channels.
Regardless of the lender, an assessment of the applicant’s credit profile will be made as a standard part of the application process. Ensuring a good credit score is maintained and paying down other debts to improve the balance sheet can contribute to a better interest rate loan offer.
To protect the loan against any further rate rises, insist on a fixed interest rate loan where the rate is fixed for the full finance period. This will provide assurance that the repayments will remain unchanged.
Another aspect to consider is new versus used goods. Interest rates which are displayed by lenders usually apply to new goods. While some loans for used goods can attract good rates, new goods u usually attract a cheaper rate. When planning a purchase, weigh up the pros and cons of the purchase and use our loan calculators to assist.
Rate rises in the near future do appear inevitable. But paying a higher interest rate than you could be paying, certainly does not have to be inevitable.
Contact Jade Finance 1300 000 008 for cheaper interest rate finance and loans.
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.