When applying for a car loan, you’ll hear lots of talk about interest rates. How do you get the lowest interest rate? How do you calculate your interest payments? And, recently, when will interest rates rise, and how much?
Interest rate rises mean buying a car is more expensive for many Australians. So, read on to learn how changing rates will impact your car loan and what you can do to ease the pressure.
As of June 2023, the RBA cash rate hit 4.10%. In the past fourteen months, Australia’s interest rates have increased dramatically. After remaining at 0.1% for over a year, the rising rates have caused a shock among many Australians.
What did interest rates look like a year ago?
| Effective Date | Change | Cash Rate Target |
| 7 Jun 2023 | +0.25 | 4.10 |
|---|---|---|
| 3 May 2023 | +0.25 | 3.85 |
| 5 Apr 2023 | 0.00 | 3.60 |
| 8 Mar 2023 | +0.25 | 3.60 |
| 8 Feb 2023 | +0.25 | 3.35 |
| 7 Dec 2022 | +0.25 | 3.10 |
| 2 Nov 2022 | +0.25 | 2.85 |
| 5 Oct 2022 | +0.25 | 2.60 |
| 7 Sep 2022 | +0.50 | 2.35 |
| 3 Aug 2022 | +0.50 | 1.85 |
| 6 Jul 2022 | +0.50 | 1.35 |
| 4 May 2022 | +0.25 | 0.35 |
| 6 Apr 2022 | 0.00 | 0.10 |
Interest rates plummeted during the Covid-19 pandemic. As the world shut down in March 2020, interest rates decreased to 0.25% from 0.75% to encourage spending. In November of the same year, they lowered again to 0.1%, where they remained until May 2022. We haven’t seen interest rates above 4% since April 2012, when it hit 4.25%.
As we return to normality, demand is higher than supply (many industries still struggle to return to pre-2020 production levels). Therefore, production is more expensive. This is true of housing, cars, and the food you buy from the grocery store. When prices rise and wages go up, inflation occurs.
To tackle rising inflation, the RBA increased interest rates. By limiting spending and taking money out of the economy, inflation stalls.
With the current cash rate at 4.10%, will interest rates go up again or remain stable? Moreover, when will interest rates decrease again? Over time, rates fluctuate. We’ve enjoyed a decade of relatively low-interest rates. The cash rate has settled somewhere between 0.1% and 3.5% in the last ten years.
However, after the 2008 financial crisis, interest rates were around 4.5% - reaching as high as 7.25% at the height of the crash.
Whether or not interest rates will continue to go up depends on many factors. There is evidence to suggest inflation will be a continuing problem for the foreseeable. A tight labour market, supply chain constraints, high energy and food prices, the ongoing pandemic, and natural disasters could all continue to push inflation up. As long as inflation increases, interest rates will likely rise again.
According to ANZ's most recent predictions, rate cuts may not be likely until November 2024. CommBank, NAB and Westpac also states that the RBA will make one further rise of 25 basis points in either July or August , bringing the cash rate to a peak of 4.35%.
On the first Tuesday of every month of the year (except January), the RBA sets the cash rate. The cash rate is like a baseline that informs interest rates. Banks and lenders use the cash rate to set their own interest rates.
When you take out a car loan, your lender will give you a personalised interest rate. Typically, this will consider your credit score, borrowing power, and the type of car you buy. Let’s say you apply for car financing, and the lender offers you $30,000 on a three-year loan with an interest rate of 5%. When the RBA raises the cash rate by 0.5%, your car loan interest rate will go up by 0.5%.
Unlike new cars, used car financing tends to be unsecured. Secured loans use the car as collateral if you cannot meet repayments. Without security, unsecured loans have higher interest rates in general to protect the lender.
While new car loan interest rates range between 4% and 8%, used car rates could be as high as 15%. An additional 2.85% on your used car loan could cost you much more.
Before taking out a car loan, it’s essential you know just how much interest rates will cost you. Seeing numbers ranging between 4% and 10% might not mean much to you. Yes, you know that lower interest rates are cheaper, but how much money are we actually talking about?
If you buy a new car for $50,000, you’ll get lower interest rates than used car loans. If the lender offers you 7.5% interest on a five-year term, you’ll pay $1001.90 monthly. Your overall interest payments over five years will cost $10,113.85. Reducing your loan term or paying a deposit will decrease your interest amount.
Use a car loan calculator to determine how interest rates affect you.
There isn’t much anyone can do about rising interest rates. As the economy shifts, interest rates naturally go up and down.
In fact, there are a few benefits to rising interest rates. For instance, your savings will do better.
However, when it comes to car loan interest rates, you can take a few measures to ease the pressure.
The lender will determine your reliability when you apply for a car loan. If you have a low credit score and several missed payments behind you, the lender will consider you a high-risk borrower. To protect themselves, they will likely offer higher interest rates. Improving your credit score could help you negotiate better rates.
If you already have a loan, your regular repayments will boost your credit score. Consider refinancing your car loan to get lower rates.
Offering a deposit will reduce the amount you need to borrow (the amount you pay interest on) and prove you are responsible with money. Those with a higher borrowing power can borrow higher amounts with lower interest rates and negotiate additional loan features that ease repayment pressure.
You can also improve your borrowing power by applying for a secured loan and using your car as collateral.
As industry experts, brokers can shop around to find the right deal for your situation. Moreover, car finance brokers can negotiate lower interest rates on your behalf. Speak to a finance broker today about your car loan options before interest rates rise again.
If you’re considering buying a car, apply for finance before rates rise again. The RBA has been increasing the cash rate every month since April 202. While we don’t know how far rates will rise, it’s a good idea to lock in the relatively low-interest rates before they increase.
As interest rates go up and down, many Aussies wonder whether to apply for a car loan sooner or later. If you apply for a car loan now, with interest rates at around 6%, you will enjoy relatively low-interest rates.
Indeed, interest rates are not as low as they were six months ago. But, instead of regretting the decision to hold off buying a car in April 2022, apply for your car loan now before interest rates go up further. Interest rates will unlikely decrease to 0.1% again for the foreseeable.
Fixed interest rates mean you pay the same interest every month, regardless of the cash rate. On the other hand, variable interest rates fluctuate with the RBA’s cash rate.
While interest rates are relatively low, a fixed-rate loan is a good idea. Fixed rates are often accused of costing more than variable interest rates. However, with rates rising, locking in a fixed rate now could save you a lot of money down the line.
Variable rates are a good choice when the cash rate is high. You hope that when the cash rate goes down, your interest rate will too. With the cash rate increasing, variable-rate car loans will similarly cost more over time. A fixed-rate car loan will remain at today’s rates.
If you already have a variable interest rate on your existing car loan, consider refinancing to a fixed-rate loan to enjoy lower rates.
Interest rates are rising relatively quickly. While you might be able to get a good deal on your car loan rates at the moment, forecasts suggest that rates will continue to go up as inflation increases. If you wish to get low rates on your car loan, speak to a finance broker today to lock in competitive interest rates.