Australia Personal Loan Interest Rates

How are personal loan interest rates calculated?

Personal lenders set their own interest rates on their products; however, they are influenced by the official cash rate set by the Reserve Bank of Australia (RBA).

After its monthly meeting, the RBA will announce if it has made any changes to the official cash rate. It could increase, decrease, or keep it the same. A number of factors influence the rate change, including statistics on spending and employment, as well as inflation and economic growth. In order to slow down borrowing, economic activity and inflation, the RBA will increase the rate. Alternatively, however, if they want to boost these things, they’ll reduce it.

Typically, Australian lenders adjust interest rates after the RBA announcement.

What types of interest rates for personal loans are there?

There are two types of interest rates for personal loans: variable Where fixed. The rate can influence the amount of your repayments and ultimately the overall cost of the loan. In addition, there is also the comparison rate to know, which includes not only the overall rate but also the costs.

Read on for a more in-depth look at how each type of interest rate works.

Variable prices:

One option when choosing a personal loan is a variable rate. This type of rate can change during the term of the loan and increase or decrease according to the evolution of the market. Where variable rates come in handy is if the rates are reduced because you will end up paying less interest than when you took out the loan. But it can also work in reverse. If the rates go up, you will have to pay back more interest than before.

The advantage of a variable personal loan is that you are unlikely to have to pay a prepayment penalty if you pay off your loan sooner than expected. So a variable option may be right for you if you are okay with the potential changes in your rate and plan to make additional repayments.

Fixed rates:

Alternatively, you can go for a fixed rate instead. This is where you get the same interest rate over the life of the loan. So, if you are consistent with your regular repayments, you will end up paying the same amount every week, fortnight, or month.

The advantage here is that if the interest rates are increased, your loan will not be affected because you have locked in your rate. On the other hand, it also means that if the rates go down, yours won’t change either. And it’s also important to note that unlike variable rate personal loans, lenders are more likely to charge prepayment fees on fixed options.

What is a comparison rate?

When weighing the different personal loan options, it is crucial to consider the comparison rate. Unlike the all-in rate, it combines both the interest and the fees you will pay.

In accordance with the National Credit Code, it is mandatory that Australian lenders advertise comparison rates on their products. This is because it is a more accurate representation of what the loan might actually cost rather than just the overall rate. In most cases, the comparison rate is higher because adding fees and charges to the loan makes it more expensive for the customer. It is therefore important that when looking at potential personal loan products, you make sure that the overall rate and the comparison rate are not significantly different. Because if they are, it means that you will likely face a number of significant costs on the loan.

Want a helping hand to start comparing? Consult the Mozo personal loan comparator.

Online lenders vs banks: how their interest rates compare?

When it comes to online lenders versus banks, there isn’t much of a difference in interest rates. Instead, you should consider how you plan to manage your loan and what your preferences are.

On the one hand, if you like traditional forms of banking, including the ability to visit your local branch, choosing a personal loan from a bank may be more beneficial for you. However, if you don’t mind managing your loan online, evaluate both banks and digital lenders to see who offers the most competitive rates.

How does my credit rating affect the interest rate on my personal loan?

More and more Australian personal lenders are offering their clients personalized interest rates based on their credit score. This is called risk-based pricing, where interest rates are determined based on the likelihood that a lender believes the borrower is in default on their loan.

How do you know if a loan offers risk-based pricing? Well, instead of advertising a rate, they will offer a minimum rate and a maximum rate. Based on a customer’s credit history, a lender is able to offer a rate that is anywhere between the advertised double digits. So, to put it simply, those with excellent credit will receive a low rate, and those with bad credit will receive a high rate.

While this type of pricing model may appear to only benefit those with good credit, it also opens up more opportunities for those with bad credit. As in some cases, lenders who do not have risk-based pricing may deny them the loan altogether.

How to get the best interest rate on a personal loan?

There is a whole range of things to consider when choosing the best personal loan interest rate for you, as well as a number of lenders to consider. So be sure to shop around and read the fine print so that the loan you sign up for is within your budget.

A great starting point is here in Mozo! We have a range of handy tools to help you:

Also, if you want to learn more about loan products in general, you can check out our loans page or other interest rate guides.

Bernadine J. Perkins