RBA Rate Rise Implications for Loans and Finance

It hasn’t happened yet, but a rise in the cash rate by the Reserve Bank of Australia (RBA) is looking increasingly likely to occur in 2022. That is much earlier than has been expected as through 2021 the RBA had indicated ‘around 2024’ as when it expected economic conditions to be in place for an increase. Recent events, especially overseas and developments in Australian economic figures have increased the talk about an early rate rise. For those with goods under finance and those considering buying goods with loans it can be helpful to appreciate the RBA rate rise implications for loans and finance.

Interest rates in Australia and in fact in most developed counties, have been cut to record lows due to the pandemic. In the US the Federal Reserve cut the rate to zero while in Australia, the RBA has held the cash rate at 0.1%, the lowest in history, since November 2020. But rates are set to rise and that will be a new experience for many Australians. The RBA has actually not raised rates since 2010.

We background the anticipate rate rise by the RBA with a number of the key influences both locally and globally and provide tips for how those seeking new loans can be best-placed to achieve the cheapest interest rate offer.

Global Influences

Recent events from central banks in other countries have add weight to the prospect that the RBA will also act in the near future. The UK’s central bank has already moved and increased that country’s key rate. Last week the US Federal Reserve Bank also lifted rates amidst soaring inflation. This was the first occasion since 2018 that the Fed had increased the rate.

Inflation has surged in the US to a much greater extent than the spike that has been experienced in Australia. But the moves by these two economies is seen by key economists in Australia as a sign that the RBA will also follow with a rate rise.

Inflation and Unemployment Data

You don’t have to be an economist to realise that inflation in Australia has increased. The rising prices on many everyday goods and especially fuel will tell you that. Inflation and unemployment are the two key economic figures that the RBA considers when making changes to the official cash rate. The RBA has given the targets for a rate rise to be inflation sustained at 2% to 3% and unemployment lower, approaching full employment.

These targets were anticipated to be achieved around 2023-2024, the expected timeframe given by the RBA for a possible rise in interest rates. But the economy bounced back from the pandemic much faster than many had expected and this has caused inflation to spike.

Adding to that, unemployment levels have continued to fall over the past few months. January figures were 4.2% and dropped to 4% in February in figures released last week. This data is now in, or at least approaching, the targets given by the RBA for a rate rise.

Implications for Loans and Finance

So what happens when the RBA raises the official cash rate? The banks and lenders respond by increasing their interest rates. Each will do this according to individual decisions and the amounts of any change can vary across lending markets, types of loans and lenders.

For those with existing fixed interest rate loans for goods such as cars, boats, caravans, motorbikes and for business equipment, the rate and the repayments should not change. A major plus in securing fixed interest rate loans! Unlike with say a home loan where the rate may only have a short fixed period, the types of loans handled by Jade Finance have interest rates fixed for the entire term.

For applications received for new loans and finance after any possible rate rise, they will be quoted based on the rates available at that time. Which is not so subtle way to say – if you’re planning to purchase goods or equipment with finance say this year – get moving if you want the cheapest rate.

Interest rates are represented in what can appear as small increments. So if the cash rate increases by a percentage of a basis point, so what? Calculate that increase over say 48-60 months of a motor vehicle loan and see ‘what’. It can be quite a shock to some to see how much extra in repayments even the smallest difference in the interest rate can mean.

To see this in action, head to one of our Compare Interest Rates calculators.

Tips to Avoid Paying Too Much on Your Loan

Hopefully this has motivated you into action to get moving and speak with us about your impending loan asap. Getting in now with a loan application and making that purchase can ensure your loan is priced at the current interest rates.

No timeframe has been given by the RBA for a rate rise. Their next meeting is in a few weeks and the notes accompanying that meeting may provide insights into timing.

To ensure your loan is protected from any future increases in interest rates, ensure you secure a fixed interest rate loan.

Rates advertised by us and by other lenders are for loans to applicants with a good credit score and for the purchase of new goods. To ensure you are well placed to receive the cheapest interest rate available, maintain your credit score at a ‘good’ rating. Adhere to loan and credit card repayment schedules and pay utilities and other bills on time!

And our top tip for achieving the cheapest interest rate loan, engage Jade Finance as your broker to secure you the cheapest offer.

Contact Jade Finance 1300 000 008 for a quote on purchasing a top seller or to discuss pre-approved motor vehicle finance.