Will my personal loan repayments drop with a new interest rate?

Your personal loan repayments will drop with a new, lower interest rate. However, you will typically need to negotiate or refinance for a lower interest rate, as a personal loan rate may not always fluctuate with the Reserve Bank of Australia’s cash rate. 

Your personal loan repayments are made up of both the principal (loan amount) and the interest (rate charged by the lender on your loan amount). The interest rate is arguably the biggest factor impacting the overall cost of your loan, as it significantly affects your personal loan repayments. The lower your interest rate, the lower your personal loan repayments may be, and vice versa for a higher rate.

This means that you can reduce your personal loan repayments with a new interest rate, if that rate is lower than what you were currently paying. 

Reducing your personal loan repayments with a new interest rate

Securing a lower interest rate on your personal loan may help you reduce your ongoing repayments. However, unlike your home loan, variable rates for personal loans typically do not move proportionately with the Reserve Bank of Australia’s (RBA) cash rate. 

If you’ve been waiting on cuts to the cash rate to flow on to your personal loan, you may be waiting a while. Even though variable rates on personal loans are subject to market fluctuations, lenders do act independently of the RBA. So, if a new cash rate won’t decrease your personal loan repayments, what will? 

Refinancing your personal loan

Refinancing your personal loan is where you switch to a new personal loan and/or lender, often with the goal of securing better terms. This is typically done to secure a lower interest rate, add features to the loan or pay fewer fees. Here are some of the ways you may reduce your personal loan repayments by refinancing:

Lower interest rate

If you can qualify for a personal loan with a lower interest rate than your current one, your monthly repayments are likely to decrease. A lower interest rate means you'll pay less in interest charges over the life of the loan. 

New loan term

If reducing your monthly expenses is your goal, you could consider moving to a new loan term. If you opt for a longer term, your monthly payments may decrease, but you'll likely pay more in interest over the long run. On the flip side, a shorter term will result in higher monthly payments but lower overall interest costs. 

Helpful features

You may choose to refinance to a personal loan that offers helpful features, such as a redraw facility. When you make extra repayments towards your personal loan, your redraw facility allows you to borrow some or all of the additional funds that you’ve paid. It also has the benefit of offsetting the principal you owe, meaning that the amount you are charged in interest is reduced. 

Fewer fees

You may also choose to switch to a personal loan that charges fewer fees to help reduce your ongoing costs. This may include switching to a low or no annual fee personal loan, or one that does not charge you for making extra repayments. 

Negotiate your personal loan rate

Refinancing a personal loan requires some time and effort on your part. You will need to go through the application process all over again andpotentially pay more in fees, such as application fees or even costly break fees for leaving a fixed rate period early. 

If you are time-poor or this seems too challenging, you may want to consider negotiating your personal loan rate. Negotiating with your lender for a new interest rate could help you reduce your monthly repayments in just one simple phone call. 

Steps to negotiating your personal loan rate

1. Research the competition: Compare personal loan offers from other lenders against your current deal. This can be used as ammunition in negotiations and as a backup if your lender won’t budge and you decide to refinance.
2. New customer rates: After two to three years of repaying your loan, you may find that your current lender is offering more competitive, lower rates to new customers. Research these lower rates and be prepared to ask for them.
3. Do you qualify?: Before you pick up the phone, check your credit score to ensure it has not decreased and that you’re still an ideal borrower. If your financial situation has changed since you last applied, you may not qualify for more competitive rates. 

Now you can pick up the phone and speak to your lender. Ask to speak to the customer retention specialists for better negotiation results, as they are typically the team with authority to offer incentives to keep you as a customer.

Present your research, including the lower rates the lender is offering new customers and the lower rates that competitors could offer you if you switch. Hopefully the lender will offer you a rate reduction.

Unfortunately, some lenders will simply refuse to budge for reasons such as operational costs. This is where your list of more competitive loan options comes in handy. You could instead consider refinancing to a lower-rate option to give yourself a rate cut and lower your repayments. 

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