Do RBA rate changes affect car loans?

It might be common knowledge that any change the Reserve Bank of Australia (RBA) makes to the cash rate will have an effect on home loans, but can it impact your car loan in the same way?

While there is generally no direct correlation between the RBA cash rate and car loan interest rates, some lenders were seen to reduce rates on certain car loan products following the two latest cash rate cuts in March this year.

The RBA had held the cash rate at 0.75 per cent since October last year before making a 0.25 per cent cut in its March meeting, followed by an out-of-cycle cut of another 0.25 percentage points the same month. In its August meeting this week, it held the cash rate at a record low of 0.25 per cent for the fifth month in a row.

In January, prior to the cuts, the lowest car loan rate on RateCity.com.au was 4.19 per cent. In comparison, the lowest rate is now 2.99 per cent.

Historically, however, car loan rates have generally been much higher than home loan rates. This suggests car loans don’t typically tend to follow the RBA cash rate changes in the same way home loans do.

What other factors determine car loan interest rates?

There are a number of factors that might affect car loan interest rates, and specifically what rates are available to you. These include:

• Loan type: Some lenders will allow you to choose between a secured car loan, where the car is used as collateral for the loan, and an unsecured car loan, where it isn’t. Lenders tend to charge higher interest rates for unsecured car loans because they consider them a higher risk than secured car loans.
• Car type: If you are buying a ‘green’ or eco-friendly car, you may be able to access green car loan options that have lower interest rates than regular car loans.
• Age of the car: If the car you are looking to buy is new, or less than five years’ old, you might be able to secure a more competitive interest rate than if you were to buy an older vehicle.
• Borrower’s credit rating: Some lenders look at the borrower’s credit score to determine whether they’d be a good borrower and repay the debt on time. Some peer-to-peer lenders use risk-based pricing, so the rate you pay is determined by the level of risk you pose based on a sliding scale.

If you currently have a variable rate car loan, it might be a good time to compare what’s available and consider negotiating with your lender to get a better deal.

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