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Impact of RBA Cash Rate Increases on Car Loan Rates

Ever since the Reserve Bank of Australia (RBA) commenced its series of rate hikes in May 2022, the topic of interest rates has dominated conversations. Discussions about skyrocketing home loan rates in the current high cash rate environment have become all too common.

Yet, it’s time we shifted our focus to another significant financial concern: car loans. Homeowners across Australia have felt the pinch of escalating mortgage rates, but the situation for car loan borrowers remains less discussed. How do car loan rates compare with the steep climbs seen in home loan rates, and why might they differ? How have they weathered the same stormy conditions and what factors uniquely influence their rates?

Let’s explore the link between the RBA cash rate and car loan interest rates, starting with the fundamentals.

Fundamentals of Car Loan Interest Rates

The RBA cash rate was not a household term until recent times. As the central bank’s primary mechanism against inflation—which had remained low for years leading up to 2022—the cash rate followed a downward trajectory, hitting a record low of 0.1% in 2020. However, the cash rate is pivotal in managing inflation and consequently influences the interest rates on products like home and car loans. When the cash rate climbs, banks face higher operational costs and typically pass these onto consumers via increased interest rates.

Secured Car Loans  
These involve collateral, usually the vehicle itself, offering lenders security against default.  
Unsecured Car Loans  
These offer no collateral, presenting a higher risk to lenders, which could result in higher interest rates.  

Comparing Trends: Car Loans vs. Home Loans

Though less talked about, car loan interest rates have exhibited different trends compared to home loans. While home loan rates have surged rapidly, car loan rates have shown a varied and often less steep increase. Several factors contribute to this discrepancy:

  1. Variability in Car Loan Rates: Rates often show more variability compared to home loans, depending on individual borrower risk assessments.
  2. Higher Starting Rates: Car loans typically had higher initial rates, providing a different starting point for increases.
  3. Size of the Loan: The smaller loan amounts for cars as compared to homes affect the impact of rate increases.
  4. Demand and Cost of Living: The elective nature of car purchases and rising living costs can temper demand and influence loan rates.
  5. Less Regulatory Scrutiny: Car loan rates often face less scrutiny, allowing for more flexibility in rate adjustments by lenders.

Influence of Interest Rates on Car Loan Repayments

Interest rates play a pivotal role in determining the monthly payments for car loans, an essential aspect for any borrower to consider. Even a minor adjustment in rates can have a significant long-term effect on the overall cost of the loan. Often, when evaluating different car loan options, potential borrowers tend to focus primarily on the interest rates advertised.

Yet, understanding the exact impact of these rates on monthly repayments can sometimes be complex. For example, in the context of a $35,000 car loan spread over three years, minor fluctuations in interest rates—such as a few basis points—may not drastically alter monthly payments. However, an increase of a full percentage point can considerably heighten the financial burden, as illustrated in the accompanying chart.

Interest rate (p.a.)Monthly repayments on a $35k, 3-year car loan
2%$1,002.49
2.5%$1,017.84
3%$1,033.34
3.5%$1,048.98
4%$1,064.77
4.5%$1,080.70
5%$1,096.77
5.5%$1,112.99
6%$1,129.35
6.5%$1,145.86
7%$1,162.50
7.5%$1,179.28
8%$1,196.20
8.5%$1,213.26
9%$1,230.46
9.5%$1,247.80
10%$1,265.28
10.5%$1,282.91
11%$1,300.68
11.5%$1,318.59
12%$1,336.65

While the interest rate is a significant factor affecting your monthly repayments, it’s not the only element to consider. Car loans often come with additional fees and charges that can significantly influence the total cost.

Lenders typically provide a comparison rate alongside the interest rate. This comparison rate reflects the true cost of the loan, taking into account various fees and charges that accompany the principal and interest components. However, it’s important to remain vigilant about hidden fees, particularly when dealing with car dealership finance.

Dealership finance often operates under a point-of-sale exemption, which means they are not required to disclose all the fees they charge fully. As a result, you might believe you’re securing a favourable deal when, in reality, the undisclosed fees could be inflating the cost significantly. Therefore, thoroughly reading the fine print of any financial agreement is essential. Understanding every detail of your loan agreement before committing can help ensure you truly are getting the best deal possible.

The Need for Vigilant Comparison

As projections increasingly indicate that the Reserve Bank of Australia (RBA) may delay any cuts to its cash rate until the end of 2024, consider how this could affect car loan rates. Although many economists believe the cash rate has peaked, predicting when the RBA will implement a reduction is challenging, with some forecasts not anticipating a cut until late 2024.

If the RBA does decide to lower rates, we can expect lenders to adjust their car loan rates accordingly. Typically, a decrease in the cash rate allows lenders to offer more competitive rates, which could lead to reduced interest rates for car loans. However, the effect of such cuts on car loans might not generate as much public interest as similar adjustments in home loan rates.

The level of scrutiny that usually accompanies home financing does not apply as rigorously to asset financing. As a result, any potential changes in car loan rates following a cash rate cut are likely to be subtler compared to the shifts seen in the home loan market. While car loan borrowers might experience some relief in their repayment amounts, these reductions may not be as pronounced or as widely recognised as those in the mortgage sector.

Making informed financial decisions is important, and borrowers should continuously seek the best possible terms for their needs. Interested in understanding your eligibility and securing the best possible rate for your car loan? Contact us to learn more.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice.

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